Small finance banks’ advances and deposits are expected to grow 22-25 per cent in FY24 and report stable profitability with a return on total assets (ROTA) of 2.1-2.4 per cent.

During the nine-month period ended December 2023, SFBs raised equity capital aggregating ₹1,527 crore and around ₹1,725 crore is expected to be raised in Q4 FY24, rating agency CARE said in a note.

“With the credit cost worries behind and access to capital, the SFBs are poised for a strong growth period,” CARE said, adding that despite the one-off news of mergers it does not expect major consolidation in the sector. AU SFB recently announced the proposed merger of Fincare SFB with itself.

Advances of SFBs grew at a CAGR of 32 per cent during FY20 and FY23 against a CAGR of 11 per cent for the banking sector. Gradual diversification of portfolios with increasing share of secured products like home, vehicle, MSME and gold loans has led to the share of microfinance (MFI) falling to 32 per cent as of March 2023 from 40 per cent in March 2020. Excluding AU SFB (the largest SFB with no MFI exposure), the MFI exposure has reduced from 59 per cent to 51 per cent.

Stable CASA base

Deposits of SFBs grew at a CAGR of 32 per cent during FY20 to FY23 against a CAGR of 11 per cent for the banking sector, led by SFBs’ strong focus on building a liability franchise and relatively higher rates of interest.

However, building a stable current account and savings account (CASA) base will continue to remain a challenge with stiff competition from established commercial banks, CARE said, adding that SFBs’ CASA deposit ratio continues to trail the banking sector.

Number of branches have grown at a CAGR of 29 per cent since March 2018. The branches are well spread out all over India with South India having the highest number of branches at 28 per cent, followed by the western region contributing 20 per cent, the report said.