Equitas Small Finance Bank Ltd Q1 FY2026 Concall Summary

Key Takeaways

• Deliberate loss to reset the book: A ₹224 crore loss was driven by a one-time management overlay and higher provisioning norms, aimed at accelerating the credit cost cycle and presenting a clean bank going forward.
• Microfinance stress is deeper and longer than expected: Collection efficiency recovery is now pushed to Q3 or Q4 FY26, forcing upfront standard asset provisioning of ₹185 crores and a calibrated MFI portfolio degrowth of 15-20% YoY.
• The secured book is the offsetting strength: Non-MFI assets, 90% secured, are growing at 20%+ YoY with improving collection efficiency; July net slippage fell to 2.19% from ~2.6% in Q1.
• Profitability metrics have reset lower: NIM compressed to 6.55% from 7.9% YoY, cost-to-income hit 70%, and full-year credit cost will exceed FY25; management targets a ~1% ROA exit by Q4.
• What to watch next quarter: Whether the July disbursement uptick sustains, the pace of MFI collection improvement, and any further spillover from state ordinances into the small-ticket LAP book.

The One-Time Reset: Provisions & Loss

• Two-part provisioning shock: The loss stems from (1) increased provisions across NPA buckets to strengthen the PCR ratio on the non-MFI book, and (2) a ₹185 crore management overlay for standard asset provisioning in microfinance. The stated intent was to speed up the credit cost cycle and "showcase the new Equitas going forward without the current drag on the system."
• Non-MFI provisioning norms tightened: Management changed provisioning norms in certain buckets on the secured book because the MFI book is shrinking, which would mechanically pull down the overall PCR. This was a one-time stock exercise; the ₹112 crore incremental impact will not repeat at the same magnitude, though new amounts entering each bucket will attract the higher norms.
• Future tightening is not ruled out: Management is "fairly clear" it will not need to tighten norms again for the rest of FY26, but cannot predict whether it will happen next year.
• MFI credit cost peak: The ₹185 crore standard asset provision in Q1 is intended to mark the peak of MFI credit cost stress; subsequent quarters should see more normalized credit cost, with another ~₹300 crore conservatively expected over the remaining nine months.

Vasudevan: "This is the first time since 2008 that we have reported a loss and hopefully, the last time too. The thought behind creating a management overlay provision and increasing the provision norms was to speed up the credit cost cycle and showcase the new Equitas going forward without the current drag on the system."

Microfinance: A Longer Road to Recovery

• Stress timeline extended: Management had expected MFI stress to taper by the beginning of FY26, but now sees collection efficiency returning to reasonable levels only by Q3 or Q4. This delay drove the upfront provisioning decision.
• MFIN Guardrail 2.0 is working: For the portfolio created between January and June 2025 under the new guardrails, X-bucket collection efficiency is about 99.6%, similar to pre-crisis levels. The problem sits in the legacy book.
• Structural profitability reset: Management believes industry-level MFI ROAs and ROEs will settle at more normal levels, with returns only equivalent to secured loan books, slightly adjusted for unsecured risk. Post the 2024 overleveraging crisis, a normal MFI credit cost is now pegged at 3-4%.
• Portfolio mix shift: The MFI book is unlikely to increase as a percentage of the total book; the sharp reduction of the last two quarters may not continue, but the ideal level is around 90% secured and 10% MFI. 100% of MFI disbursements are now covered under CGFMU.
• Group lending model under strain: The willingness of group members to pay someone else's EMI when that person has not come to the meeting is what has broken down, even though the group assembly still happens.

Vasudevan: "In microfinance, it was expected that the stress levels might taper down in the beginning of this financial year. However, it now looks like that the collection efficiency may come back to reasonable levels only by the third or fourth quarter of this financial year."

Secured Book & Growth Levers

• Non-MFI book performing: The 90% secured book is delivering on both growth and collection efficiencies. July net slippage for the non-MFI book came down to 2.19% from ~2.6% in Q1, and July disbursements at ₹1,582 crore were well above the Q1 monthly average of ₹1,170 crore.
• Secured growth target: Management is targeting 20%+ YoY growth from the secured book, with overall advances growth of 15-16% for the full year including the MFI drag.
• Housing finance turning profitable: The affordable housing business turned profitable in Q1 and is targeted for 20%+ growth this year, supported by 18-20 new branches and 30 spoke locations.
• New business lines building: Used car lending is already profitable; AD1 (forex) and credit cards will start generating revenue this year, with real revenue expected from FY27. The selfie loan app disbursed ₹437 crore in Q1.
• Branch expansion: 50 new branches planned to support secured advance growth.

Asset Quality: Spillover & Slippage Drivers

• State ordinance spillover: Karnataka and Tamil Nadu passed acts preventing coercive recovery by lenders. Though not applicable to banks, there has been a spillover effect on the lower end of small-ticket loan against property. The bank stopped below-₹3-lakh LAP around November last year and tightened norms for certain borrower segments.
• Non-MFI DPD spike in Karnataka: A sharp increase in DPD from Q4 to Q1 was concentrated in the Karnataka market due to sudden flow. This has been brought under control; July 1-90 DPD has come down in both MFI and non-MFI books.
• Slippage drivers in non-MFI: Two products contributed to higher slippages versus Q4: Vehicle Finance, which shows Q1 seasonality but is lower than Q1 last year, and Small Business Loans, impacted by the ordinance effect on mortgage loans under ₹10 lakhs, primarily in Karnataka.
• Normalized credit cost expectation: Assuming a 10% MFI book and normalized conditions, management expects ~1.5% credit cost at the bank level, comprising 0.3-0.4% from MFI and 1-1.25% from non-MFI.

Margins, NIM & Operating Leverage

• NIM compression driven by MFI: NIM fell to 6.55% from 7.9% YoY, largely due to contraction in the microfinance portfolio and interest income reversals from elevated delinquencies. Yield on gross advances declined 29 bps QoQ.
• NIM outlook flat: NIMs are expected to hover around current levels for the year. Cost of funds is moderating, but even as interest reversals decline with improving asset quality, growth acceleration will offset the benefit.
• Cost-to-income at peak: Cost-to-income hit 70% versus 65% last year, driven by income-side pressure from MFI reversals and muted disbursements, plus opex growth of ~19% for the year as frontline people are added. Management believes the ratio has peaked and targets 60-65% within two years.
• Fixed cost structure limits flexibility: Most costs are fixed (people, branch rental, IT); variable cost is very small. A drop in business does not automatically reduce fixed costs, so the path to improvement runs through growth restoration, not cost cutting.
• Interest rate tailwind: About 90% of the loan book is under fixed-rate loans; in a declining interest rate scenario, the bank expects to benefit.

Mohan: "I think we may be at the peak of a cost-to-income cycle given that most of it has got factored in, and we are seeing growth coming in... Looking a little ahead, even in our projections, we are looking at, let's say, 2 years from now, our cost to income to be between 60% to 65%."

Capital, Funding & Licensing

• Capital raised: The bank raised a second tranche of ₹500 crore in Tier 2 capital in July 2025 and received shareholder approval to raise ₹1,250 crore in Tier 1 equity.
• Cost of funds trajectory: Cost of funds is expected to moderate over the rest of the year, though the Tier 2 raise will dampen this slightly.
• FCNR deposits launched: The bank launched FCNR deposits this quarter, garnering over USD 3 million.
• Universal banking license on the horizon: No fresh investment is required for the application. The bank can apply next year if GNPA and NNPA remain below 3% and 1% respectively for March 2026.
• FX business commenced: Treasury commenced FX business in Q1 in line with the AD1 license granted by RBI, with inward, outward and prepaid forex products on the roadmap for Q2.

Guidance & Commitments

Key Metrics