Microfinance loans, personal loans by SFBs to moderate in fiscal 2025: Report

In FY25, rating agency CRISIL predicts that microfinance loans and unsecured personal loans will experience a decrease in quality due to increased borrower indebtedness. This may also affect certain secured asset classes catering to a similar customer segment.

Small finance banks (SFBs) are expected to see a decrease in profitability, with a projected 40 basis points decrease in return on assets (ROA) to 1.7%. This is mainly due to lower net interest margins and higher credit costs.

SFBs' net interest margins are expected to decrease by 15 basis points as they shift towards more secured asset classes with relatively lower yields. Additionally, credit costs may rise by 40 basis points due to increasing delinquencies, particularly in the microfinance and unsecured segments.

CRISIL anticipates that SFBs' operating expenses will remain steady, leading to a reduction in pre-provisioning operating profitability to -3.5% in fiscal 2025 from 3.6% in the previous fiscal year. It is noted that credit costs will continue to significantly impact overall profitability.

SFBs face challenges during periods of economic stress, which can lead to higher delinquencies and credit costs, as observed during the recent pandemic.