Mumbai: The profitability of small finance banks (SFBs) measured in terms of return of assets (RoA) is likely to decline by around 40 basis points to 1.7 per cent this fiscal from 2.1 per cent for fiscal 2024 due to lower net interest margins (NIM) and higher credit costs said Crisil Ratings in its report on Friday. One basis point is one-hundredth of a percentage point.
That said, RoA for SFBs will still be higher than that for the overall banking system by 50-60 bps on account of the relatively higher yielding nature of their loan book. The NIM or difference between the interest income earned from loans and paid to depositors is expected to contract by 15 basis points as they continue diversifying to secured asset classes, which have relatively lower yields.
Credit cost or loan impairment charges, meanwhile, may rise 40 bps because of rising delinquencies, primarily in the microfinance and other unsecured segments.
In fiscal 2025, microfinance loans and unsecured personal loans, where early signs of stress are visible on account of a rise in borrower indebtedness, will see a moderation in portfolio quality. Sub-segments within secured asset classes, catering in part to a similar customer segment, could also see higher delinquencies.
Recently deputy Governor of RBI, Swaminathan J had called on small finance banks (SFB) to adopt "responsible lending practices" and not charge excessive interest rates and usurious fees.
