Small Finance Banks’ Profitability Hit by Rising Costs
Small Finance Banks (SFBs) in India are grappling with declining profitability due to increasing funding and credit costs. According to a recent report, their Return on Assets (RoA) is projected to drop to 1.4-1.6% for FY25, compared to 2.1% in FY24.
The rising cost of funds has significantly impacted SFBs’ net interest margins. As these banks shift focus toward secured loans, which yield lower returns, their margins are further compressed. Additionally, increasing delinquencies in the microfinance segment have led to higher credit costs, with SFBs being forced to allocate substantial provisions for non-performing assets (NPAs).
Operational costs have also surged due to expansion initiatives like branch openings and efforts to recover dues from defaulters. Asset quality, which had shown improvement in previous years, is now under pressure. Gross NPAs rose by 50 basis points in the first half of FY25, driven by stress in microfinance portfolios.
The growth in assets under management (AUM) is expected to slow, with projections of 18-20% growth in FY25, down from 24% in FY24. While a slight recovery to 22-23% is anticipated for FY26, the immediate outlook remains challenging.
Small Finance Banks are focusing on optimizing operational efficiency to mitigate these pressures. However, stakeholders emphasize the need for effective cost management and risk mitigation strategies to navigate the evolving financial landscape.
