Thriving Small Finance Banks: Navigating Growth and Deposit Challenges

The Indian banking landscape has witnessed a remarkable transformation in recent years, with the emergence of Small Finance Banks (SFBs) playing a pivotal role in driving financial inclusion and catering to the diverse needs of the underserved population. In the first quarter of the current financial year (FY25), these specialized institutions have showcased their resilience, posting healthy loan growth and navigating the evolving deposit landscape.

Unlocking the Potential of Small Finance Banks

Robust Loan Growth: A Testament to Resilience

The first quarter of FY25 has seen Small Finance Banks (SFBs) demonstrating their ability to drive sustainable growth in their loan portfolios. Equitas SFB, for instance, reported a remarkable 17.80% increase in advances during the April-June period, reaching a total of Rs 29,601 crore. Similarly, Capital SFB and Suryoday SFB experienced impressive growth rates of 16% and 46%, respectively, in the same period. This surge in lending activity underscores the SFBs' commitment to expanding their reach and catering to the diverse financial needs of their target segments.Notably, the growth in advances was not limited to the year-on-year comparison but also showcased sequential improvements. Equitas SFB, Suryoday SFB, and Capital SFB recorded quarter-on-quarter increases of 1.6%, 4%, and 3.75%, respectively, demonstrating their ability to maintain a steady pace of growth even in the face of evolving market dynamics.

Deposit Mobilization: Navigating the Challenges

While the SFBs have excelled in their lending operations, the deposit landscape has presented some challenges. The current and savings account (CASA) deposits of these institutions have faced sequential pressure, even as overall deposit growth remained robust.Equitas SFB, for instance, witnessed a marginal decline in its CASA ratio, which fell from 32% in the previous quarter to 31% in the reported quarter. Similarly, Suryoday SFB's CASA ratio declined from 20.10% in Q4FY24 to 17.70% in the first quarter of FY25. This trend suggests that the SFBs have had to rely more on term deposits to fuel their growth, potentially impacting their cost of funds and overall profitability.However, the overall deposit growth for the SFBs remained strong, with Equitas SFB, Capital SFB, and Suryoday SFB reporting year-on-year increases of 35.40%, 10%, and 42%, respectively. This highlights the SFBs' ability to attract a diverse range of depositors and maintain a healthy funding base to support their lending activities.

Balancing Act: Credit-to-Deposit Ratios

As the SFBs navigate the evolving deposit landscape, they must also carefully manage their credit-to-deposit (CD) ratios to ensure a balanced and sustainable growth trajectory. In the first quarter of FY25, Capital SFB's CD ratio dipped to 79.6%, down from 82.2% in the corresponding quarter of the previous year.This decline in the CD ratio suggests that the SFB may have room to further expand its lending activities, provided it can continue to attract deposits at a pace that matches its loan growth. The ability to maintain a healthy CD ratio is crucial for SFBs, as it reflects their capacity to efficiently utilize their funding sources and generate optimal returns.

Navigating the Evolving Landscape: Strategies and Opportunities

As the Small Finance Banks navigate the evolving landscape, they must adopt strategic approaches to address the challenges and capitalize on the emerging opportunities. Enhancing their CASA deposit base, diversifying their funding sources, and optimizing their credit-to-deposit ratios will be key priorities for these institutions.Additionally, SFBs can explore innovative digital solutions to streamline their operations, improve customer experience, and enhance their reach in underserved regions. Leveraging technology to drive financial inclusion and cater to the unique needs of their target segments will be crucial in maintaining their competitive edge.Furthermore, SFBs can explore strategic partnerships and collaborations with other financial institutions, fintech players, and ecosystem participants to expand their product offerings, access new customer segments, and leverage complementary capabilities.By addressing the deposit challenges, maintaining a healthy balance sheet, and embracing technological advancements, Small Finance Banks can continue to play a pivotal role in driving financial inclusion and supporting the growth of the Indian economy.