Sustained healthy deposit growth at competitive rates critical to support advances growth
Advances of small finance banks (SFBs)[1] are poised to cross Rs 2 lakh crore this fiscal, marking a growth of 16-17% on-year, and surpassing last fiscal’s ~13% (see chart 1 in annexure).
The uptick will be driven by continued expansion in the non-microfinance segments coupled with calibrated recovery of the microfinance loan book from the degrowth seen last fiscal.
Amid the healthy credit growth, building a granular and sustainable liability franchise remains crucial for SFBs.
Segmental diversification has been a long-running growth theme for SFBs, most of which were microfinance institutions (MFIs) at the time of conversion. The approach will continue this fiscal as well with recent headwinds in microfinance persuading sharper focus on diversification to other segments to minimise asset-quality concerns.
Diversification is also crucial because the Reserve Bank of India (RBI) guidelines[2] mandate thresholds of 3% and 1% for gross and net non-performing assets, respectively[3], for SFBs to acquire a universal banking license. Given the susceptibility of microfinance loans to sociopolitical pressures, diversification, particularly into secured asset classes, would support asset quality. In addition, these guidelines qualitatively accord preference to SFBs with a diversified loan portfolio.
The share of non-microfinance advances in SFB loans had already risen to ~67% as of March 2025 from ~50% as of March 2022. Within this, mortgage loans (housing loans and loans against property) had the largest share, having grown at an estimated 3-year compound annual growth rate (CAGR) of 38%. This was followed by vehicle loans and micro, small and medium enterprise (MSME) loans, which grew at 3-year CAGRs of 32% and 31%, respectively. SFBs have also increased the share of gold loans, agricultural credit, loan against fixed deposits and wholesale funding in their loan portfolios over the past three fiscals.
Says Aparna Kirubakaran, Director, Crisil Ratings, “This fiscal, credit growth in the non-microfinance segments is expected to be 23-25%. While lower interest rates will support demand for affordable housing, policy spurs for MSMEs and tailwinds from the recent reduction in the goods and services tax on vehicle loans will be helpful, too. Microfinance, on the other hand, will grow a relatively slower 4-5%, but that will still be a rebound from the 14% decline last fiscal. The sharper focus on non-microfinance segments will increase their share to an estimated 70% of all advances by the close of this fiscal.”
While SFBs are poised for a steady loan book expansion, their ability to mobilise deposits at competitive costs and build a granular liability franchise will continue to be a key cog of their growth strategy. Their deposits had grown 25% last fiscal and 34% in fiscal 2024 (see chart 2 in annexure), strongly outpacing growth in advances.
Over the years, the share of deposits in overall external liabilities of SFBs has risen sequentially (91% as of March 31, 2025, from 70% as on March 31, 2020). This was driven by retail deposits (including those from current accounts and savings accounts, or CASA), which clocked a 5-year CAGR of 34% in fiscals 2021-2025.
The share of retail deposits in the overall SFB deposits has remained above 70% since interest rates started trending up in February 2022. However, its composition has moderately shifted towards retail term deposits[4] because of the higher opportunity cost that deposit-holders incur for keeping CASA deposits when interest rates are rising.
Says Vani Ojasvi, Associate Director, Crisil Ratings, “Historically, what has aided deposit accretion for SFBs is the premium in interest rates offered over universal banks. Even today, that differential is 75-80[5] basis points.
Their ability to offer higher deposit rates has been supported by relatively higher asset yields, giving them a cushion to manage net interest margins. However, in the long run—as the share of the relatively lower interest-yielding secured asset classes in overall SFB advances increases—it will be imperative for them to build more sustainable deposit and funding mobilisation strategies to manage profitability.”
Competition for deposits remains stiff, particularly given the sequential decline in the share of the more stable household savings in the overall banking sector deposits. Thus, the ability of SFBs to sustain healthy deposit growth, while increasing their share of cost-efficient deposits, remains monitorable.
Their growth aspirations are supported by healthy capital cushion, reflected in a three-year average buffer of 11.7 percentage points (pps) and 9.5 pps over the stipulated regulatory thresholds for Tier I and overall capital adequacy ratio, respectively.
Their growth prospects should remain intact this fiscal. However, their ability to come up with strategies to ensure suitable mobilisation of liabilities will be the key to sustaining this.
