Small finance banks to grow their advances by 25-27 per cent this fiscal

In terms of geographical penetration, their branch networks more than doubled over the five years through March 2024, to 7,400. The maximum growth is in Eastern states with 15 percent of total branches, up from 11 percent in March 2019. More than half the existing SFB branches are in rural and semi-urban regions.

Even as large banks struggle to get deposits, SFBs collected 30 percent more deposits in fiscal 2024, outpacing their credit growth of 28 percent. Deposits now constitute 90 percent of their borrowings, but their growth comes at a higher cost for two reasons.

One is an increase in the share of relatively more expensive bulk term deposits to almost 30 percent of total deposits as of March 2024 from 23 percent in fiscal 2022. The share of low-cost Casa deposits dropped to 28 percent from 35 percent and that of retail term deposits also fell.

Two, SFBs offer a premium of 50-250 bps in interest rates over universal banks, even in the same category of deposits.

To optimise deposit mobilisation, the reliance on term deposits will continue, given the higher opportunity cost to maintain Casa balances for depositors in the current interest rate scenario, he adds.

According to Subha Sri Narayanan, a director of the agency, SFBs will need to explore alternative funding routes to balance growth and funding costs, especially given the growing share of lower-yielding secured assets.

Securitisation is gaining currency, with transactions reaching Rs 9,000 crore last fiscal from Rs 6,300 crore in fiscal 2023, with five SFBs tapping the market.