Equitas Small Finance Bank Ltd Q4 FY2025 Concall Summary

Key Takeaways

• MFI credit cost surge wiped out profit: Credit cost in Microfinance jumped from 2.3% to 11.37%, erasing ~INR630 crores of profit and compressing full-year RoA to 0.32%.
• MFI book being deliberately shrunk: Advances will drop from ~INR4,500 crores to ~INR3,000 crores by March '26, falling to mid-single-digit share of the loan book, as the bank restricts sourcing to existing clients and enforces strict guardrails.
• NIM compressed on mix shift, not pricing: NIM fell from 8.36% to 7.51% as high-yield MFI assets ran off, while yield on advances held steady at ~16.3% and cost of funds remained ~7.5%.
• RoA recovery path is back-end loaded: Management expects to exit Q4 FY26 above 1% RoA, with credit costs staying elevated through H1 FY26 before normalizing from Q3 onward.
• What to watch next quarter: Whether Q1 credit costs land within the promised "elevated" band, the pace of Micro LAP growth as MFI teams redeploy, and any deposit cost relief from the April rate cut.

The MFI Shock: What Happened and the Response

• Credit cost explosion: Microfinance credit cost moved from 2.3% in FY24 to 11.37% in FY25, wiping away about INR630 crores of profit. The bank responded by slashing fresh disbursements, so MFI advances fell from INR6,265 crores to ~INR4,500 crores, delivering a double hit of high credit costs and lower income.
• Disbursement share collapsed: MFI fell to 8.32% of overall disbursement in Q4 FY25 versus 29% in Q4 FY24, dragging yield on disbursement down 140 bps QoQ to 16.76%.
• Guardrails restrict fresh lending: 48% of existing MFI clients are now ineligible for fresh funding under the stricter norms implemented in January. Collection efficiency has been improving since, so management sees no negative impact from the guardrails themselves.
• TN ordinance a non-event so far: Unlike Karnataka, where market disturbance preceded the ordinance, Tamil Nadu's move appears proactive rather than reactive, and no collection behaviour change has been observed.
• The strategic verdict: Management is explicit that Microfinance will keep shrinking to a much smaller part of the book so that any future sector crisis cannot put the bank in the same situation again. The book may not go to zero, but it will fall below mid-single-digit share by FY27.

Vasudevan: "I think from Equitas' side, we are very clear in our view that over time, Microfinance will continue to go down and be much smaller and smaller part of the book so that any problems in that space should not really put us into the kind of situation that we found ourselves in last year."

Asset Quality: Where the Stress Is, and Isn't

• Non-MFI credit cost normal at ~1%: Outside Microfinance, credit cost sits at about 1%, which management considers the normal run-rate for its low-ticket, informal-economy customer base and is priced into the products.
• SBL GNPA comfortable given yield: SBL gross NPA of 2.54% is within acceptable range. Within SBL, Micro LAP (INR2,600 crore book) carries GNPA of 4-4.5% but credit cost of only 0.4%, because customers tend to settle rather than lose their only property. Overall SBL credit cost is 0.3%.
• Vehicle Finance old overdue book improving: The legacy overdue pool shrank from 16% to 14.5%, and X-bucket collection efficiency moved to ~99%. Used Car (53% growth) and Used CV (24% growth) are the focus, while New CV was deliberately degrown by 13%.
• Non-MFI SMA stable: SMA-2 improved marginally from 1.69% to 1.5%, SMA-1 ticked up slightly from 2.7% to 2.8%, and SMA-0 fell from 3.9% to 3.65%. Management views these as normal levels for the customer segment.
• Stress provision partly reversed: Of the INR100 crore provision created in Q2 for MFI SMA-1/2, ~INR38 crores was used in Q3 and ~INR23 crores was reversed in Q4 as the stressed customer profile within that segment declined, leaving ~INR38 crores unutilized.
• SBL slippage question sidestepped: When an analyst noted SBL slippages rising quarter by quarter and asked whether a legacy book was driving the trend, management said they see no underlying stress and no specific geography showing strain, then offered to take the discussion offline.

The Pivot: Micro LAP and Secured Assets Take Over

• MFI team redeployed to Micro LAP: The entire Microfinance team has been trained on Micro LAP, and bandwidth is being allocated to grow that book as MFI shrinks. This also helps meet PSL requirements in the small and marginal farmer category.
• SBL growth engine intact: SBL grew 25% YoY with collection efficiencies above 99% across the year and 99.2% in Q4. The merchant overdraft book reached INR1,400 crores across 51,000 customers, and management intends to grow it further this year.
• Affordable Housing and MSE turning profitable: Both segments are expected to reach profitability this year, adding to the secured-asset mix. Housing finance GNPA is considered normal given the self-employed and own-construction customer profile.
• Loan book mix stabilizing: SBL will stay around 45% of the book, affordable housing at 12-15%, and other segments may shift 2-3% as MFI drops. No dramatic remix is planned, and no new products will be added for the next two years.

Phadke: "In the coming months, as the Microfinance book degrows and the Micro LAP book grows, we see that an era of uncertainty will disappear, and I see a very glorious future for the bank."

Margins, Costs and the Liability Franchise

• NIM decline is a mix story: NIM fell from 8.36% to 7.51% largely because the high-yield MFI book shrank. Yield on advances held steady around 16.3%, and cost of funds was stable at ~7.5% for the full year.
• Operating costs rose on investment: OpEx grew 15% for the full year as the bank invested in technology, people and new products, pushing the cost-to-income ratio to 67.64% from 63.74%. PPOP stayed flat at INR1,334 crores despite revenue growth.
• Deposit rates being cut: The peak deposit rate was reduced 25 bps in October (8.5% to 8.25%) and another 20 bps in April (8.25% to 8.05%). The savings account rate on the lowest slab was tweaked from 3% to 2.75% effective 1 May. The benefit of the October cut should show in another two quarters.
• CASA ratio slipped to 29% from 32% last year. Management's recovery plan rests on three strategies: family banking for the elite segment, merchant acquiring for current accounts, and the NR segment once AD-I goes live, plus a CorpSal D2C digital journey going live soon.
• Landed cost of money rose because cost of funds moved up 1% (6.5% to 7.5%), though the operating cost of raising money actually fell as deposit growth outpaced cost growth. Management will add a slide on this trend next quarter but declined to give a specific improvement number now.

Guidance & Commitments

Key Metrics