15 hrs ago
Small Finance Banks’ Profitability Set to More Than Double in FY27
Small finance banks have had a harder time making profits because some microfinance borrowers struggled to repay loans.
Crisil Ratings expects that pressure to ease in the coming year.
Banks are collecting more repayments, and newer loans are performing better.
This could mean banks need to set aside less money for losses.
Their interest margins are also expected to improve.
But attracting deposits may remain costly, and weather problems could make it harder for some borrowers to repay.
Banks will need to balance profits, funding costs and loan quality.
Crisil Ratings expects small finance banks’ profitability to more than double in FY2027 as microfinance stress eases.
Credit costs are projected to fall to about 1.5% this fiscal, from 2.3–2.5% over the previous two fiscals.
Net interest margins are forecast to rise to 7.1–7.3% in FY2027 from around 6.2% in FY2026.
Improved collections, fewer loan slippages and stronger performance of recently originated loans are expected to reduce provisions.
Deposit competition, lower-yielding secured assets and possible El Niño-related disruption to borrowers’ cash flows remain risks.
- Who
- Small finance banks, with forecasts and analysis from Crisil Ratings.
- What
- Profitability is expected to more than double in FY2027 as microfinance stress eases and net interest margins recover.
- Where
- India.
- When
- FY2027; the comparison includes FY2026 and the previous two fiscals.
- Why
- Lower credit costs, fewer microfinance loan slippages and recovering net interest margins are expected to support earnings.
Factors supporting recovery
Risks to the outlook
Profitability outlook
Factors supporting recovery
Crisil Ratings expects lower credit costs and recovering net interest margins to drive a more than doubling of profitability in FY2027.
Risks to the outlook
Deposit competition and a shift toward secured, relatively lower-yielding assets could constrain profitability.
Microfinance loan performance
Factors supporting recovery
Higher collection efficiency, fewer new slippages and stabilising recently originated loans are expected to ease provisioning.
Risks to the outlook
El Niño-related weather disruption or drought could weaken borrowers’ cash flows and repayment capacity.
Key facts
- Projected profitability
- Expected to more than double in FY2027.
- Credit costs
- Projected at around 1.5% this fiscal, compared with 2.3–2.5% over the previous two fiscals.
- Net interest margins
- Forecast at 7.1–7.3% in FY2027, up from around 6.2% in FY2026.
- Recent NIM decline
- Margins contracted by nearly 200 basis points between FY2024 and FY2026.
- Retail deposits
- More than 70% of small finance banks’ total deposits.
- FCNR(B) deposit drive
- Small finance banks offered rates 50–100 basis points above universal banks but collected less than 1% of deposits mobilised through the route.
- Potential risks
- Deposit competition, a shift toward lower-yielding secured assets, and El Niño-related weather disruption or drought.
Quotes
Aparna Kirubakaran
Director at Crisil Ratings.
“The improvement will be driven by significantly lower interest income reversals as microfinance slippages moderate, alongside healthy advances growth, including a measured revival in the high-yielding microfinance portfolio.”
businesstoday.in
“Credit costs are projected to decline to around 1.5% this fiscal from 2.3-2.5% over the previous two fiscals.”
businesstoday.in
Sources
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