New Delhi, Oct 28 : Advances of small finance banks (SFBs) are poised to cross Rs 2 lakh crore this fiscal -- marking a growth of 16-17 per cent year-on-year (YoY), and surpassing last fiscal's 13 per cent growth rate, a report said on Tuesday.

The uptick will be driven by continued expansion in the non-microfinance segments, coupled with the 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, Crisil Ratings said in its report.

According to the report, the share of non-microfinance advances in SFB loans had already risen to 67 per cent as of March 2025, from 50 per cent 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 per cent.

This was followed by vehicle loans and micro, small and medium enterprise (MSME) loans, which grew at 3-year compounded annual growth rates (CAGRs) of 32 per cent and 31 per cent, respectively.

SFBs have also increased the share of gold loans, agricultural credit, loans against fixed deposits and wholesale funding in their loan portfolios over the past three fiscals.

'This fiscal, credit growth in the non-microfinance segments is expected to be 23-25 per cent. 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," said Aparna Kirubakaran, Director, Crisil Ratings.

Microfinance, on the other hand, will grow at a relatively slower 4-5 per cent, but that will still be a rebound from the 14 per cent decline last fiscal, she added.

Meanwhile, according to the report, 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 a sharper focus on diversification to other segments to minimise asset-quality concerns.

Diversification is also crucial because the Reserve Bank of India (RBI) guidelines mandate thresholds of 3 per cent and 1 per cent for gross and net non-performing assets, respectively, 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 report said.

/IANS