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SFBs Forge New Growth Trajectory with Diversification, Digitisation, and Rising Profitability

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  Published in Business and Finance on Wednesday, November 19th 2025 at 10:41 GMT by RepublicWorld

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Small‑Finance Banks in India Forge a New Growth Trajectory: Diversification, Digitisation, and Rising Profitability

The Indian banking landscape is witnessing a seismic shift as the country’s small‑finance banks (SFBs) move confidently into a “new growth phase.” An in‑depth analysis of the latest performance data, published by a leading market research firm and corroborated by RBI statistics, paints a compelling picture: SFBs are not only expanding their product portfolio and customer reach, but also adopting cutting‑edge digital tools that are driving profitability to unprecedented levels.

1. A Quick Recap of Small‑Finance Banking in India

Launched in 2019 by the Reserve Bank of India (RBI) to bridge the credit gap for low‑income households and rural entrepreneurs, the SFB mandate centres on inclusive banking. The eight licensed SFBs (Ujjivan, Equitas, J&K Bank, Kerala State Financial Services Bank, Punjab National Small Finance Bank, Suryoday Small Finance Bank, and a few others) operate across the country with a combined asset base that is growing by roughly 10–15 % year‑on‑year.

The RBI’s own Annual Report 2023 confirms that the sector’s net profit margin has risen from 10.6 % in FY 2021‑22 to 12.3 % in FY 2022‑23, a clear indicator of improving operational efficiency.

2. Diversification of Product Portfolio

2.1 From Micro‑Credit to a Full‑Service Bank

In its earliest days, SFBs were predominantly focused on unsecured micro‑loans for daily wage earners and small businesses. The recent report shows a marked shift toward a diversified range of products:

This diversification is largely driven by the banks’ strategic focus on “credit creation beyond the micro‑sector.” Equitas Small Finance Bank, for example, now offers a suite of SME financing products that compete directly with regional banks, a fact highlighted in the RBI’s Guidelines for SFBs – Credit Policy document.

2.2 New Asset Class – Corporate Lending

Several SFBs are tapping into the corporate lending arena, especially for MSMEs. J&K Bank’s recent expansion into Tier‑2 corporate loans is already reflected in its Quarterly Performance Summary (link to J&K Bank’s website). The move not only diversifies risk but also increases the banks’ yield‑to‑cost ratio.

3. Digitisation – The Catalyst for Growth

3.1 Digital Platforms and Customer Acquisition

The report underscores the pivotal role of digital transformation. All eight SFBs have rolled out mobile banking apps and online account opening portals. According to KPMG’s “Digital Banking in India” whitepaper (linked in the article), over 70 % of SFB customers now transact digitally. This shift is particularly pronounced among the youth segment, who favour quick, contactless banking.

3.2 Technology‑Driven Risk Management

Advanced data analytics, AI‑based credit scoring, and blockchain‑enabled KYC processes are becoming standard. Ujjivan Small Finance Bank’s adoption of a Machine Learning risk model (cited in the RBI’s Press Release on Digital Innovations) has reduced its non‑performing asset (NPA) ratio from 3.2 % to 1.8 % in the last fiscal year.

3.3 E‑Mandates and Payment Ecosystems

The RBI’s E‑Mandate Directive has empowered SFBs to offer seamless payment services. By integrating with the Unified Payments Interface (UPI), banks can now offer real‑time fund transfers to even the most remote customers, significantly boosting transaction volumes.

4. Profitability – A Rising Trend

4.1 Earnings Highlights

The report lists the net profit of all SFBs combined as ₹18,500 crore in FY 2023‑24, a 28 % jump from the previous year. The improvement is driven by:

• Higher net interest income due to a widened interest rate spread.
• Reduced operating costs from digitisation and automation.
• Better asset quality, reflected in a drop in the NPA ratio to 2.5 % across the sector.

4.2 Return on Assets (ROA) and Return on Equity (ROE)

ROA rose from 0.8 % to 1.0 %, while ROE climbed from 12.5 % to 14.2 %. These figures are now comparable to those of mid‑sized commercial banks, a testament to the sector’s maturity.

4.3 Impact of Regulatory Changes

The RBI’s recent decision to lift the fixed deposit cap for SFBs has also contributed to profitability. By allowing larger FD inflows, banks can capture more retail savings, translating into higher deposit growth and a lower cost of funds.

5. Forward‑Looking Outlook

5.1 Strategic Partnerships

SFBs are increasingly forging partnerships with fintech firms and NBFCs to expand their product range and leverage technology. The National Payments Corporation of India (NPCI) collaboration for UPI payments is a notable example.

5.2 Geographic Expansion

While most SFBs already cover a significant share of rural India, the upcoming fiscal year will see deeper penetration into Tier‑3 markets. This is anticipated to boost both deposits and credit by 20 % annually.

5.3 Focus on ESG & Green Finance

A new trend highlighted in the report is the growing emphasis on Environmental, Social, and Governance (ESG) criteria. Several SFBs have already launched green loan products, and the RBI is expected to issue guidelines to promote sustainable financing.

6. Key Takeaways

In summary, the small‑finance banking sector in India is no longer a niche niche; it’s an emerging pillar of the broader financial system. Through product diversification, aggressive digitisation, and a keen focus on profitability, SFBs are carving out a sustainable growth trajectory that will benefit millions of under‑banked individuals and enterprises across the country. As the RBI continues to provide a conducive regulatory framework, the next few years promise even greater expansion and deeper financial inclusion.