Capital Small Finance Bank Ltd Q1 FY2026 Concall Summary

Key Takeaways

• Steady quarter, soft macro: Net interest margin held at 4.1% despite sharp rate cuts, while deposit growth accelerated and asset quality stayed broadly stable with an isolated NBFC/MFI slip.
• MSME and LAP are the growth engines: MSME grew 25.6% YoY and LAP within mortgage grew 23.6% YoY, offsetting a deliberate slowdown in housing loans ahead of anticipated rate cuts.
• A contained, known credit blemish: The NBFC/MFI slippage is ring-fenced to corporate lending to MFIs, not direct microfinance; 57% of remaining standard MFI accounts are A-plus rated with 57% cash margin available.
• PSL relaxation unlocks mortgage growth: The RBI's cut in the non-PSL limit from 25% to 40% frees the bank to build its LAP book without being constrained by priority-sector caps.
• What to watch next quarter: Whether the promised 20% loan growth stays on track, the pace of Haryana branch expansion, and any further signals from the NBFC/MFI recovery effort.

Growth Drivers & Portfolio Mix

• MSME leads the charge: The MSME portfolio grew 25.6% YoY and 9% QoQ, making it the highest-disbursement segment in a RAM-heavy quarter.
• Mortgage pivot to LAP: Housing loans were consciously slowed last year because management anticipated sharp rate cuts that would have hit the P&L; LAP now constitutes 55%+ of the mortgage book and is "fully firing."
• Corporate book optics: The corporate loan book appears larger because average ticket size fell after the capital raise; the bank is optimizing value per customer rather than adding more NBFCs.
• Agri portfolio bottoming out: The portfolio declined in Q1 due to wheat harvest cash flows and recovery seasonality, but absolute value was almost static (change of hardly ₹1 crore). Management expects double-digit growth ahead as the ground is "now completely cleared."
• Seasonality fading: Before FY25, the book showed higher seasonality when agriculture was 35-37%+; from FY25 onward, seasonality is "almost getting muted."
• Disbursement momentum: Q1 disbursement grew 15% YoY and 13% sequentially; management says demand is not a challenge, with good momentum in the middle-income group segment.

Munish Jain: "Given at that time, lending at the rate with the cut of interest rates so sharply. P&L would have been taken a hit."

Asset Quality & the NBFC/MFI Slippage

• Stable core, isolated stress: Gross NPAs were unchanged YoY, and SMA1 and SMA2 showed notable improvement. The credit cost increase of 0.19% came entirely from NBFC/MFI slippage and is considered temporary.
• The MFI exposure is indirect: The bank does not do direct MFI lending; the slippage is from the corporate NBFC book where it lends to MFIs. The main NBFC book, which is toward secured lending NBFCs, shows no signs of concern.
• No contagion in the corporate book: Except for the account that turned NPA, there are no SMAs (neither SMA-0, SMA-1, nor SMA-2) in the corporate loan book.
• Recovery posture: Management declined to give account-wise recovery details due to a secrecy clause but stated they have other rights available and are moving ahead.
• Credit cost guidance: For the remaining three quarters of FY26, management expects to maintain credit cost in the delta of 0.1% to 0.2%, with no spike anticipated.
• Security backbone: 99.8% of loans are secured and 79% are collateralized; the corporate book is secured against receivables with some FLDG of 5% to 10% in some cases.

Munish Jain: "At this stage, I will not be able to comment, just there may be a scenario like macro factors, how the factor looks like, we will be targeting, because we want to keep an eye on the ROTA as well. We want to ensure that we continue to have a ROTA expansion. We'll be trying to create a fine balance between the net NPA number and the ROTA."

Margins, NIM & Profitability

• NIM held at 4.1%: Despite a declining interest rate environment and sharp rate cuts, NIM was maintained through robust liquidity management and prudent asset deployment.
• Fixed-rate book as a shield: The increasing fixed-rate advance book (now 47.4%) and the fact that only 11.25% of the book is EBR-linked (directly impacted by rate cuts) helped insulate NIM; MCLR-linked book impact comes with a lag.
• NIM guidance: Management intends to maintain NIM around the same level, plus/minus a few basis points.
• ROTA expansion levers: Three drivers: NIM expansion, non-interest income expansion, and optimizing the cost-income ratio. ROTA has been continuously expanding for the last 5+ years.
• Other income surge: Other income grew 38% YoY, driven by all four verticals: advance-related, operational, banca, and forex/treasury.
• CD ratio gap: The bank intends to improve the average CD ratio over the next 3 quarters to shrink the gap between ROA and ROAA, which currently has a 1.5x delta.

Munish Jain: "So despite a very sharp rate cuts, so we are able to maintain our net interest margin. So we intend to maintain it around the same level, plus/minus a few basis points."

Liability Franchise & Deposit Strategy

• Deposit growth accelerated: Strong momentum on the deposit front, supported by favourable monetary policy cues including RBI rate cuts, liquidity support measures, and the CRR reduction.
• Growth came late in the quarter: Deposit growth accelerated in the last 1.5 to 2 months post interest rate cuts; money was raised temporarily before deployment in advances, not a demand slowdown.
• SURU-heavy, retail-centric: The target customer is the middle-income group for both liabilities and assets; the bank intends to be the primary banker (cash flow accounts), not a standalone term depositor. The franchise is granular, retail-centric, and SURU-heavy.
• Pricing strategy: The bank pays a 30-40 bps premium over the top 3 public/private sector banks and does not map with other players on the street, leveraging its 24-year-plus liability franchise.
• Customer base cleansing: The drop from 7.8 lakh to 7.6 lakh customers reflects a cleansing activity where zero-balance or petty-balance accounts posing additional risk were flushed out; the acquisition run rate remained the same as Q4.

Munish Jain: "We are not raising very high-priced deposit from the urban. Rather, our deposit is coming more from a semi-urban and rural where we had a thicker branch presence."

Geography & Branch Expansion

• Haryana as the next Punjab: Management is replicating the Punjab model in Haryana, internally calling it "making Haryana next Punjab." The bank plans to add about 13 more branches in Haryana over 12-15 months and has started opening unbanked rural branches there.
• Branch expansion plan: The bank intends to add 20 to 25 branches this financial year and enter one more state, adding to its current presence in 5 states and 2 union territories.
• Contiguous expansion philosophy: The branch expansion philosophy is contiguous, grounded in the belief that "liability will follow the trust."
• Punjab not neglected: While no specific target is set for reducing Punjab dependency, the bank wants to continue improving the percentile and also ensure accelerated growth from Punjab.
• Haryana agri cautious: The bank will do some portion of agriculture in Haryana but not in a larger way; it remains open for agriculture lending in good agri belts.

Sarvjit Samra: "we are replicating, now we call it making Haryana next Punjab, which we internally call it, and we are in the process of it."

Regulatory Tailwind: PSL Relaxation

• Non-PSL limit raised: The RBI's relaxation of the non-PSL limit from 25% to 40% is a "very welcoming" change that reduces the arbitrage between SFBs and UCBs.
• LAP book unshackled: The change allows the bank to build its LAP book within mortgage more freely without being restricted by growth limits that previously capped non-PSL lending.
• Corporate book legroom: The PSL guidance cut from 75% to 60% gives additional legroom to grow the corporate loan book.

Munish Jain: "It's a very welcoming relaxation. I will say that is the arbitrage between SFB and UCB has further been reduced."

Guidance & Commitments

Key Metrics