Equitas Small Finance Bank Ltd Q2 FY2026 Concall Summary

Key Takeaways

• Stress receding, bank returns to profit: PAT of ₹24 cr vs a ₹224 cr loss in Q1, driven by a sharp credit cost improvement to 2.16% and flat operating costs. Management declared the multi-quarter stress cycle is behind the bank.
• MFI pain is healing, not gone: X Bucket resolution improved, fresh OD flow collapsed from ₹97 cr in April to ₹24 cr in October, and recent disbursements show 99.52% resolution. The MFI book will be capped at 10% of the loan book to prevent a repeat.
• NIM hit bottom, recovery promised: NIM fell to 6.29% from 7.69% YoY on MFI contraction and interest reversals. Management expects a Q3 reversal and a year-end exit above 6.5%, with a steady-state range of 6.5% to 7%.
• Non-MFI engine is firing: Highest ever quarterly disbursements of ₹4,700 cr, with used car finance growing 43%, micro LAP 39%, and MSE finance 36%. This diversification is the growth story beyond MFI.
• What to watch next quarter: Whether NIM actually inflects upward, the pace of net slippage reduction in both MFI and non-MFI books, and the disbursement ramp-up in gold loans and affordable housing from asset branches.

MFI Stress: The Turn

• The damage is contained: The MFI portfolio, which was 20% of the book when stress hit, dragged the bank into a loss in Q1. The stress was concentrated in Karnataka MLAP and the broader MFI X-bucket, but both are now reversing. Karnataka October collections were the best in months, and the MLAP issue was a two-quarter event on a secured, low-LTV book where historical loss given default is practically nil.
• Fresh slippage pipeline is shrinking: Fresh OD flow in MFI dropped from ₹97 cr in April to ₹24 cr in October, a decisive decline. The last six months of MFI disbursements show 99.52% X Bucket resolution, meaning new loans are performing.
• The yield hit is technical, not structural: MFI yield fell from 23.7% to 22.4%, but management attributes this entirely to interest reversals on NPAs from higher slippages, not rate cuts. As fresh OD flow reduces, the yield should plateau.
• Karnataka guardrails tightened: The bank implemented additional norms for Karnataka: only one external lender plus Equitas (1+1), and an indebtedness cap of ₹1.5 lakhs versus ₹2 lakhs elsewhere.
• The 10% cap is a lesson learned: Management was explicit that the 20% MFI share "put the bank behind for almost four quarters" and will not be repeated. The cap is a structural risk limit, not a growth target.
• Monthly repayment shift underway: 41% of the MFI book is now on a monthly repayment cycle, up from the traditional 28-day cycle, a change that started in August and should improve customer cash flow alignment.

Vasudevan: "In sum, we believe that the stress in microfinance, both at the sector level and at our bank level has come down to a very acceptable level, and we expect this product to trend towards normal levels of profitability from the fourth quarter of this financial year."

NIM & Profitability Trajectory

• The NIM walk: NIM compressed to 6.29% from 7.69% YoY, with the QoQ drop largely driven by the average MFI portfolio outstanding shrinking between Q1 and Q2. Non-MFI yield held stable at 15%, while overall yield on advances fell 33 bps QoQ to 15.73% on the MFI mix shift.
• The recovery bet: Management expects NIM to rise in both Q3 and Q4, crossing 6.5% by year-end. The steady-state NIM target is 6.5% to 7%, implying the current 6.29% is a trough.
• Credit cost normalization: Credit cost improved sharply to 2.16% from 6.48% in Q1, with non-MFI credit cost at a manageable 1.01%. The steady-state target is 1.5% to 1.7%, with the taper expected by Q4 FY26. Even in a worst-case scenario, annualized MFI credit cost is pegged at ~4%, or ₹170-180 cr.
• ROA ambition: Management targets a steady-state ROA of 1.5%+ in the short to medium term, though specific initiatives and a timeline were not detailed when pressed.
• Cost of funds discipline: The bank aims to keep its cost-of-funds differential versus larger banks to no more than 1% to 1.1% in absolute terms.

Vasudevan: "But by end of the year, I think the 6.3% should cross 6.5%. And on an ongoing basis, on a steady-state basis, I think we should be looking at anything between 6.5% to 7% as a steady state."

Non-MFI Growth: The Diversification Engine

• Record disbursements: Non-MFI quarterly disbursements hit an all-time high of ₹4,700 cr, with used car finance growing 43%, micro LAP 39%, and MSE finance 36%. This is the growth engine that will dilute the MFI book to the targeted 8-10% share.
• Branch-light expansion: The bank is not adding standalone branches. Instead, it is layering new products (affordable housing, vehicle finance, gold loans) onto its existing 500-branch network with only incremental manpower cost, a capital-efficient distribution strategy.
• Gold loan launch scaling: Gold loans, piloted in over 200 liability branches, have built a ~₹400 cr book. The product is now being extended to 50 asset branches in H2 FY26 and another 150 next fiscal. GNPA is negligible, and the bank plans bucketed pricing based on loan size after 1.5 years of process refinement.
• Affordable housing push: Currently in 70 branches, the product will expand to 30 more existing asset branches in Q3 and approximately 120 more next fiscal, targeting Tier 2-5 towns.
• Used car finance focus: The bank identified 100 high-potential existing branches for accelerated growth in this segment.
• NR proposition building: AD-1, FCNR, and inward remittance are live; outward and prepaid forex are expected in the next three months. The seafarer segment is a specific target.

Asset Quality: The Clean-Up

• Net slippages declining: Net slippages fell to ₹355 cr from ₹453 cr QoQ, with improvement in both MFI and non-MFI books. Further reduction is expected in Q3, with normalcy from Q4 onwards.
• ARC sale executed: The bank sold ₹216.46 cr of NPA advances from the secured portfolio to an ARC, receiving ₹72 cr in cash. The sale triggered a ₹40 cr excess provision reversal to the P&L, but also caused PCR drops in SBL (below the 27% minimum) and housing (from 47% to ~28%) because higher-DPD cases were removed.
• Standard asset provision partially utilized: The ₹185 cr one-time provision created in Q1 for MFI X-bucket customers with more than three lenders was utilized by ₹58 cr in Q2. Of the total, ₹78 cr did not require provisioning: ₹38 cr moved to NPA and the rest ran down.
• Non-MFI slippage detail withheld: Management declined to provide a gross slippage breakup between MFI and non-MFI, citing confusion in inter-firm comparisons, and now discloses only net slippage. A product-level breakup of non-MFI net slippages (MLAP, used CV) was not available but may be provided next quarter.
• Tamil Nadu and Karnataka trends: Tamil Nadu X-bucket efficiency is at 99.2-99.3%; Karnataka, the stress epicenter, is reversing and almost at 99%.

Balance Sheet & Capital

• Tier 2 capital raised: The bank successfully raised a second tranche of ₹500 cr in July 2025, bolstering the capital base.
• Treasury income modest: Treasury contributed ₹34 cr in Q2 amid volatile markets driven by global news, US Fed rate cuts, trade tariffs, and the GST 2.0 announcement that hardened the 10-year yield by ~25 bps.
• ECL transition upside: Draft ECL guidelines are not yet applicable to SFBs. If a universal bank license is obtained, management noted that current NPA provisions are much higher than what ECL would require, implying a positive one-time impact.
• Operating cost discipline: Operating costs were flat sequentially, helped by a 5% decline in other operating expenses.

Guidance & Commitments

Key Metrics