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Small finance banks’ return on assets may more than double in FY27 as microfinance collections improve, Crisil Ratings projected in its 9 October 2026 report.
Crisil Ratings’ 9 October 2026 report, Easing Credit Cost, Growth to Lift RoA of Small Finance Banks to 1.3–1.5%, follows 2 financial years of rising microfinance defaults and higher provisions against troubled loans. The forecast concerns return on assets, not total net profits in rupees.
Better earnings could support lending to small borrowers across India. They do not establish that loan rates will fall. Crisil also flagged expensive deposits and the risk of drought affecting rural repayments.
As overdue microfinance accounts increased, banks reduced lending in this relatively high-yielding segment. Stricter borrower checks followed. More recent loans have since shown better repayment performance.
Fewer fresh defaults could reduce provisions. Crisil also expects a measured return to microfinance lending alongside growth in other loans.
The October projections put the change in financial terms:
Net interest margins weakened when banks reversed income from overdue microfinance loans. Fewer reversals are now expected to help margins recover.
The Department of Financial Services, in its banking information updated on 6 January 2026, lists small businesses and marginal farmers among the groups SFBs were established to serve. Those borrowers faced tighter lending as defaults rose.
The Economic Survey 2025–26, presented on 29 January 2026, counted 627 lakh active microfinance borrowers in FY25, against 330 lakh in FY14. Women accounted for 95%. These are sector-wide figures, not SFB totals. The figures appear in the Ministry of Finance's release dated 29 January 2026.
Our assessment: stronger bank earnings do not change an existing borrower’s loan terms. Our guide to small finance banks describes the services these lenders provide.
Aparna Kirubakaran, Director at Crisil Ratings, linked lower expected credit costs to better collections, fewer new overdue accounts and the stabilisation of recent microfinance loans. The anticipated drop in provisions is central to the projected earnings recovery. She warned that drought and El Niño could affect borrowers’ cash flows.
Vani Ojasvi, Associate Director at Crisil Ratings, expects fewer interest reversals to improve margins. She also identified efficient liability management as critical to sustaining profitability. High deposit rates could otherwise eat into the gains.
In its 2 September 2026 release, For Small Finance Banks, GNPA to Decline by ~120 Bps This fiscal year, Crisil forecasts a reduction of about 120 basis points in the overall gross NPA ratio by March 2027. Microfinance loans represented around 30% of SFB advances, although the segment contributed a much higher share of loan delinquencies.
The report linked this to borrower overleveraging. SFBs tightened loan assessments; newer loans have performed better. Before the downturn, return on assets stood at 2.3% in FY24.
Retail deposits account for more than 70% of SFB deposits. During a recent foreign-currency deposit mobilisation drive, SFBs offered rates 50–100 basis points higher than universal banks but drew less than 1% of the deposits raised through that route.
Secured loans generally earn less than microfinance loans, leaving banks less room to absorb high deposit costs.
Crisil’s FY27 forecast points to recovering loan collections and fewer provisions after 2 weak years. Whether the improvement lasts will depend on funding costs and the performance of both microfinance and newer secured loans.
Return on assets of 1.3–1.5%, compared with below 0.6% in each of the preceding 2 financial years.
Overdue microfinance loans raised provisioning costs. Banks also slowed lending in that higher-yielding segment.
The Crisil report forecasts bank profitability, not a cut in the interest rates charged to borrowers.
Crisil’s September report linked the earlier stress partly to borrower overleveraging. Lending checks have since been tightened.
A sector-wide forecast cannot establish the position of an individual bank. Its own loan quality and funding costs still need examination.
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