NIM compression, uptick in credit costs to weigh on profitability
The profitability of small finance banks (SFBs), measured in terms of return of assets (RoA), will moderate around 40 basis points (bps) to ~1.7% this fiscal from ~2.1% for fiscal 2024 (refer to Chart 1) due to lower net interest margins (NIM) and higher credit costs.
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.
NIM for SFBs is expected to contract ~15 bps as they continue diversifying to secured asset classes, which have relatively lower yields.
Credit cost, meanwhile, may rise ~40 bps because of rising delinquencies, primarily in the microfinance and other unsecured segments. An uptick in delinquencies, albeit more controlled, is also likely in sub-segments of secured assets classes catering to a similar customer segment.
SFBs have been focusing on segmental diversification as a core growth strategy. With many having started out as microfinance lenders, the diversification has largely been towards secured asset classes (primarily loans against property, housing loans and vehicle loans), to curtail potential volatility in asset quality and earnings.
Says Subha Sri Narayanan, Director, CRISIL Ratings, "The share of secured asset classes, which come at a lower yield of 6-7 percentage points on average, is set to rise to almost 65% of overall SFB advances by end of fiscal 2025 from ~62% in March 2024. While deposit costs will remain structurally higher than universal banks, diversification into alternate funding avenues, should support stability in funding costs. All said, NIMs are likely to compress 15 bps to ~7.2% for the fiscal." |
