Equitas Small Finance Bank: A Profitable lender to small businesses

FY25Q1 Concall Summary

Positives

• Growth in retail term deposit growth, CASA being stable, growth in used cars, housing, SBL. Microfinance had muted growth which is inline with the guidance of reducing it’s weightage.
• CD ratio is healthy and may be bought slightly down. CRM app developed on Microsoft Dynamic platform will be rolled out shortly. Selfie Loan app launched last quarter is seeing good traction will be a good lead generator.

Negatives

• Low Disbursement (especially April); Loan growth was also not that much due to heat wave, elections, confident that it’ll get back.
• Spike in credit cost – one reason is due to higher provisions (to adhere to RBI notice on the requirements to become a universal bank: net NPA < 1%). Second is lower collections due to seasonality.
• Higher slippage in the quarter mainly due to higher slippages in microfinance (~140% jump) and commercial vehicles (70% jump). They’re monitoring microfinance sector closely and expects CV slippages to stabilize. They’ve slowed down disbursement in microfinance which lead to decrease in NIMs.
• Any guidance on credit costs will be given after assessing the second quarter after observing how the microfinance part of their portfolio performs.
• Lower loan growth (17%-18%) compared to the guidance of 25% but confident to achieve the guidance.
• Investments in technology will maintain the cost-to-income ratio at last year’s level.
• During the quarter, there was a technical write-off totaling INR 114 crores, with INR 98 crores related to the microfinance portfolio.

Q&A

• The average yield on advances in housing finance has increased and is now approximately 12%.
• Most of the investments will be done in 3-4 years. Credit cost guidance will be given post second quarter, as they need to evaluate the effects of maintaining a 70% PCR and trends in microfinance collections.
• Cost of fund has 2 parts – the cost of savings accounts and the cost of replacement deposits. Last year higher % of deposits were renewed at higher rates, impacting the cost of funds while this year, less % of deposits are due for renewal, reducing the impact on the cost of funds.
• Despite uncertainty in credit costs, 25% growth guidance is maintained since microfinance will be compensated with growth in secured loans, introduction of personal loans and credit cards.
• The real challenge according to them is maintaining 1.25% credit cost, the spike in VL credit cost will be brought down but the cause of concern in microfinance.
• They’re looking at micro LAP as a mimic to microfinance for similar yields. Slowing down on NBFC, new CV as they’re low yield products and focusing on higher yield products.
• The RBI’s uniform guidelines for microfinance lending have impacted the industry. Under the new guidelines, households with an income of around INR 3 lakh are eligible for loans up to INR 2 lakh, leading to increased indebtedness, driving up ticket sizes and borrower indebtedness quickly.
• Experiencing an extended period of high slippages in its microfinance portfolio, over 9-10 months. It is difficult to predict when conditions will return to normal.
• The microfinance stress is not uniform across India but is concentrated in specific states like Punjab, Haryana, Gujrat, certain branches of Maharashtra, Erode in TN.

I’ve tried to understand and summarize whatever I found interesting. Any and every feedback is appreciated.