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 Assets under management for small finance banks are estimated to rise by 20 per cent in FY22, as against 18 per cent increase in the last fiscal, rating agency ICRA said.

Small Finance Banks' main objective is to take basic banking activities to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, among others. Like other commercial banks, these banks can also lend and take deposits.

As per the rating agency's report, even as the growth in portfolio is expected to drive an improvement in revenue, the expected elevated credit costs are likely to keep the profitability subdued in FY22.

Besides, ICRA maintained its cautious stance, as the recent surge in Covid-19 infections could play a spoilsport and impact the recovery in growth.

Amid the second wave of the pandemic, SFBs witnessed decline in collections as well as quality metrics of the assets.

"Credit costs are expected to remain elevated in FY22 as well, which would keep the profitability subdued. Over the long term, SFBs' ability to improve the operating efficiency further and control the credit costs would be imperative for improving the return," said Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings at ICRA.

Further, the overall risk profile of SFBs' portfolio remains high given the higher proportion of unsecured loans despite their foray into retail asset classes such as vehicle loans, business loans, loan against property and housing finance over the last few years.