Capital Small Finance Bank Ltd Q3 FY2026 Concall Summary

Key Takeaways

• Stable quarter, deposit-led optimism: NIM held at 4% while cost of deposits began to decline; management expects the real NIM expansion to arrive over the next 6 months as older term deposits reprice.
• Asset quality is seasonal, not structural: Gross and net NPA improved marginally, slippage fell, but SMA 1 and 2 rose to 6.46% due to a predictable agricultural cash-flow lag in Punjab and Haryana; management sees it normalising below 5%.
• MSME is the growth engine: The MSME book grew 42% YoY, and business loans are expected to lead growth for the next 12 months, while the Agriculture book stays cautious after flood-like conditions.
• A new partnership model opens geographies: The bank initiated FLDG-based secured lending with partner NBFCs to enter states like Rajasthan without a thick branch network, targeting high-yielding assets with credit risk on the partner.
• What to watch next quarter: Whether the 23% of term deposits repricing in Q4 actually delivers the promised NIM uptick, and whether SMA normalises below 5% as the agricultural cash-flow cycle completes.

Margin & Deposit Cost Trajectory

• NIM held steady at 4% as the yield on advances stabilised at 11%, while the benefit of deposit repricing is still in its early stages; management targets an exit above 4.2% to 4.3%.
• Cost of deposits declined to 5.86% from 5.92% QoQ, helped by a saving bank rate cut to 3.1% in November 2025 and an initial 15-20 bps reduction in the 1-year term deposit contract rate.
• The big repricing wave is still ahead: 64% of term deposits are older, higher-rate contracts, with 23% maturing in Q4 FY26, 46% in Q1 FY27, and 27% in Q2 FY27; management expects this to add roughly 3-5 bps to NIM in Q4, ~10 bps in Q1, and ~15 bps in Q2.
• CD ratio expansion is the second NIM lever, though no specific timeline was given for moving meaningfully toward the 85% target.
• One rate cut from December is yet to be absorbed into the advance portfolio, which will partially offset the deposit-side benefit in Q4.

Munish Jain: "Out of this, 23% are getting due in Q4 FY '26 for repricing, 46% are getting due in Q1 FY '27 and 27% being in Q2 FY '27."

Asset Quality & the Seasonal SMA Pattern

• Gross NPA and net NPA improved by 2 bps and 3 bps sequentially, while the slippage ratio fell to 1.21% from 1.73% in Q2; credit cost remained stable at 0.2% and management expects to keep it in a 0.15%-0.25% band.
• SMA 1 and 2 rose to 6.46% because agricultural cash flows in Punjab, Haryana and North India get credited in late November and December, with a time lag before they reach MSME and self-employed borrowers; the same pattern appeared in the year-ago quarter (6.05%) and in June 2025.
• Agriculture NPA optics are distorted by a shrinking book: the outstanding has grown sub-5% for 5-6 quarters, so the NPA ratio rose even though the absolute NPA value did not increase significantly; gross slippage from Agriculture is 50% of total gross slippages.
• The strategy is recovery, not write-off: the bank has never had a material write-off in its Agriculture portfolio over 26 years, and land collateral is valued conservatively at below 50% LTV on a collateral rate, not market price.
• MFI exposure is largely resolved: original outstandings of ~₹21-22 crores are down to a net NPA of ₹7 crores, with provisions taken and management confident of recovering the major share.
• PCR improved to 50.46% from ~49.5%, consistent with the bank's policy of maintaining coverage above 50%.

Munish Jain: "SMAs are always, you will see slightly elevated in June quarter and December quarter. Reason being in that particular period, transition of the Agri cash flow to the full economy is not completed."

Loan Book Growth & Mix

• MSME grew 42% YoY and was described as "the flavour for the quarter"; business loans are expected to lead growth for the next 12 months.
• LAP, a high-yielding product, grew 18% and remains a core part of the secured lending franchise.
• Agriculture lending stays cautious after flood-like conditions in Punjab; the book will grow but not at a pace proportionate to the total advance book, and the bank is prioritising recovery over fresh disbursement.
• The target mix is for Agriculture, housing, LAP and business loans to form 75%-80% of the portfolio.
• Geographic diversification is accelerating: advances outside Punjab grew at more than twice the bank's overall growth rate, and the out-of-Punjab portfolio reached 24% of total advances, up from 21% a year ago.
• The bank is entering Rajasthan, Himachal and J&K, with customer sensitisation in Rajasthan at an advanced stage and reasonable traction from the business community.
• Partnership-led lending uses the FLDG framework with credit risk on the partner NBFC, targeting secured, high-yielding assets in geographies where the bank lacks a thick branch presence; partner incentives are linked to portfolio quality.
• NBFC lending is selective: the bank targets highly rated, adequately capitalised and low-leveraged NBFCs, with 72.1% of NBFC clients rated A and above; it is not a starter lender to small or early-age NBFCs.

Munish Jain: "This partnership-led lending is with an FLDG framework that is with the credit risk with the partner as per the permissible under the law."

Profitability & Efficiency

• PPOP excluding the exceptional item rose 20% YoY and 21% sequentially to ₹57 crores, driven by sustained cost optimisation.
• Cost-to-income improved to 60.9% from 61.7% in Q2 and 62.1% a year ago; Q4 is expected around similar levels, with a downward trajectory over a 3-year horizon.
• ROA currently stands at ~1.3% excluding the one-time Labour Code charge of ₹5.13 crores; management targets 1.4% in FY27, with ~5 bps improvement per quarter starting Q1, assuming no further rate cuts.
• ROE expansion of 15% plus is part of the medium-term commitment.
• The largest contributor to ROA improvement will be NIM expansion from 4% to 4.2%-4.3%, followed by operating-expense optimisation.
• Term deposit rates have already moved: the 1-year (400-day) contract started the year at 7.6% and is now at 7%, with a 15-20 bps reduction taken in Q3; further cuts will depend on monetary policy outcomes.

Munish Jain: "I believe the largest contributor here will be the NIM expansion. NIM is today at 4%. We want to take it upward of 4.2% to 4.3% levels."

Guidance & Commitments

Key Metrics