EQUITAS SMALL FINANCE BANK (NSE: EQUITASBNK) Q1 2026 Earnings Call dated Aug. 08, 2025
Corporate Participants:
Unidentified Speaker
Vasudevan Pathangi Narasimhan — Managing Director & CEO
Sridharan Nanuiyer — Chief Financial Officer
Jagadesh J. — Head, Assets
Murali Vaidyanathan — Senior President & Country Head, Liabilities
G Gopalakrishnan — Head of Treasury
Dheeraj Mohan — Head of Strategy, Investor Relations, BI and CX
Analysts:
Unidentified Participant
Darshan Deora — Analyst
Priyank Chheda — Analyst
Ronak Chheda — Analyst
Ashlesh Sonje — Analyst
Ashlesh Sonje — Analyst
Presentation:
operator
Ladies and gentlemen, good day and welcome to Equitus Small Finance Bank Ltd. Financial performance for Q1FY26 earnings conference call. We have with us today Mr. P.N. vasudevan, M.D. and CEO Mr. Balaji N. Executive Director, Technology and Operations. Mr. Sridharan N. CFO Mr. Jagdish J. Head of Assets, Mr. Murali Vaidanathan. Senior President and Country Head, Branch Banking Liabilities, product and Wealth Mr. Gopal Krishnan G. Head, Treasury, Mr. Dheeraj Mohan. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes.
Should you need assistance during this conference call, please signal an operator by pressing star 100 on your touchstone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. P.N. Vasudevan. Sir. Thank you. And over to you sir.
Vasudevan Pathangi Narasimhan — Managing Director & CEO
Thank you. Good evening to all of you and thank you for taking your time out in this call. I would also like to take the pleasure of inviting our chairman Mr. Anil Kumar Sharma for this con call. We had a board meeting in Chennai today and he was here and so he is agreed to participate in this call. So he is also present in this room today. Welcome and thank you sir. Now let me give a brief of what happened in the first quarter and how do we see it moving forward? We had a P pop of rupees three hundred sixteen crores for the first quarter and provisions as per the existing norms were rupees 281 crores which would have resulted in a PAT of about 26 crore for the quarter.
However, we have made two extra provisions namely one being increase in provisions in various NPA buckets to strengthen the PCR ratio and the other being a management overlay in terms of standard asset provisioning for microfinance, this has led to a loss for the first quarter. This is the first time since 2008 that we have reported the 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.
In microfinance, it was expected that the stress levels might taper down in the beginning of the 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. This is what has led us to take the call to upfront provision buffer so that we can look forward to a more normal quarter in the later part of this financial year. We have started calibrated lending in microfinance, balancing the long term goal of reduced dependency on microfinance and the short term goal of improving collection efficiencies.
The discipline in lending based on the MFIN guardrail is expected to improve the quality of new portfolio getting created while a separate team for overdue collections has been put in place. Caseloads for X bucket also is being reduced to improve both collection efficiency and servicing of existing clients. We had implemented The MPIN guardrails 2.0 from January 25th out of the portfolio created between Jan to June of 25. The expected efficiency is about 99.6% which is more or less what we used to have before this whole crisis started sometime in the first week first quarter of last year.
We have been in the MFI space now for about two decades with a high vintage staff right from branch manager and above who have seen multiple good and bad times over these years. The initiatives taken both at our bank and industry level should help reach acceptable levels of normalcy in the months to come. Karnataka and Tamil Nadu have passed acts to prevent coercive recovery practice by lenders. These acts are not applicable to banks, however at the ground level there has been a spillover effect on banks too in the lower end of the small ticket loan against property.
This was visible a few quarters back and we had taken certain proactive measures. We don’t anticipate further stress to build in the segment we operate, especially given that we don’t operate in the below 3 lakh rupee lakh segment which we stopped sometime last year. I guess somewhere around November or so we stopped less than 3 lakh rupee loans and we also taken some proactive steps in terms of tightening our norms for certain segment of borrowers. Our diversification strategy which was started back in 2011 holds good and has helped us achieve a secured advance book of about 90% as of first quarter.
The secured book is also fairly diversified in terms of different product categories. With new products turning profitable and MFI likely to get back to normal soon, we expect to deliver decent return on equity in the quarters ahead. On the deposit front, we have revised our rates across products and slabs both in savings and td. We should see cost of funds moderating in the coming months. The rupees 500 crore of tier 2 that we raised in July 25th will of course dampen this a little bit, but directionally we will see cost of funds coming down over the rest of the year we have about 90% of our loan book under fixed rate loans.
In a declining interest rate scenario we expect to benefit. We have registered a growth of 8% in advances for the first quarter and expect to end the year with a growth of about 15 16%. Jagdish will go into further details on his plans of how he will go about achieving this. As we know One of the SOBs has got an in principle license to convert into a universal bank yesterday. This works well for the SOB industry as it lays down the direction in which SFBs could potentially proceed going forward. I would like to conclude by saying that we have tried to be prudent in terms of upfronting, possible stress of the next few quarters and with most indicators trending better. We expect to get back to our normal levels of performance soon.
I now hand over to Sridhar, our CFO.
Sridharan Nanuiyer — Chief Financial Officer
Good evening everyone. Thank you for joining us today for the Q1 FY26 earnings call of Ecota Small Finance Bank. Our net interest income and other income for the quarter was 786 crores and 286 crores respectively. Our yield advances adjusting for securitization and other off book items dropped by 44bps on Y& Y basis on account of drop in microfinance mix. Our net interest margin stood at 6.55% down from 7.9% last year largely due to contraction in the microfinance Portfolio is currently at 9% in Q1FY26 as against 17% in Q1FY25. Tertiary income has majorly contributed to other income segment with yoi increase of 321% resulting in net income of 1071 crores with year on year of 8%.
The total opex increased by 16% y on y on account of employee expenses related to bonus and annual payment. This quarter we reported a loss of 224 crores per primarily driven by the additional provision which we have made. While this affects our short term profitability, it strengthens our balance sheet and prepare us for a sustainable growth. Despite these challenges, our P POP remained healthy at 315 crores on Q on Q basis reflecting the underlying strength of our core operations. Our GNP stood at 2.82% and NNP at 0.95%. The provision coverage ratio remains robust at 67.03% and we expect the credit cost to taper down by Q4FY26.
Gross advances grew 8% y on y to 37,610 crore while microfinance contracted by 41%. Our non MFI book grew 18% y on y led by 22% growth in small business loans and 50% growth in used car finance. On the liability side, total deposits grew 18% y on y to 44,379 crores. Our CASA ratio remains stable at 29% and retrace deposits now form 73% of our deposit base. We launched FCNR Deposit this quarter garnering over US$3 million and continue to deepen our retail franchise. As of June 30th, 2025 cr stood at 20.48%. During July 25th we have raised a second tranche of 500 crores of tier 2 capital. This additional tier 2 capital will improve the car by about 1.7% taking the overall car to about 22%. Our capital adequacy remains strong and we have received shareholder Approval to raise 1250 crore in Tier 1 equity to support future growth. Thank you once again for your continued support and trust.
I would like to hand over to Mr. Jagdish, our head of affairs for his commentaries.
Jagadesh J. — Head, Assets
Thank you Sujitha. Good evening everyone. We have closed the quarter with gross advances of 37,610 crores reflecting an air growth of 8%. Importantly, our secured book contributes 90% which is our non micro finance portfolio has grown healthily by 18% year on year and now stands at 34,073 crores.
Among the secured book, our small business loans which is our flagship product reached 16,067 crores with 22% year on year and 2.5% quarter on quarter growth. Within our small business loans, our micro lab product has shown an exceptional momentum growth of 51% year on year growth and coming back to vehicle finance, we have grown by 12% year on year to 9,510 crores. Among the vehicle finance used cars grown by 50% year on year and used commercial vehicles grown by 26%. We continue to focus on used commercial vehicles and used cars while strategically reducing the exposure to NCV new commercial vehicles.
Our housing finance book stands at 4868 crores with a growth of 12% year on year and 2 percentage quarter on quarter and our MSC finance assumes strong traction growth of 37 percentage year on year two 1696 crores and microfinance portfolio is at 3537 crores with a decline of 41% year on year and 22% quarter on quarter. On the digital front, our selfie loan app has gained good traction with 437 crores dispersed in quarter one, the yield on gross advances declined by 29bps quarter on quarter primarily due to the elevated delinquencies and contraction in the microfinance portfolio.
Looking ahead, the July disbursements have already reached 1582 crores, well above the quarter one monthly average of 1170 crores indicating a strong start to Q2. To support the growth in secured advances we have planned to add 50 new branches and also to add more manpower to deepen the penetration in the existing branches. And for the current financial year we are looking at a growth of close to 15 to 16 percentage year on year growth in the overall asset book including MFI. This can be done. We are already growing at 18 percentage in our non microfinance book, so we are looking at a growth of 20 percentage plus year on year growth from our secured book and also having a calibrated approach on our disbursement for microfinance where the degrowth of 41 for the Q1 will be calibrated to a degrowth of close to 15 to 20% year on year.
And regarding the asset quality there was a signs of recovery in the month of July. Our microfinance 1 to 90 DPD improved to 7.09% in July and non microfinance portfolio DPD also improved to 9.29 thereby improving the overall DPD trend for the bank in July. And also on the slippages part our non MFI net slippage reduced to 2.04 percentage in July from 2.67 in Q1. So we are strengthening our collection framework by establishing a dedicated vertical for overdue and NPL recoveries with early signs of recovery in the sweat segment and enhanced field level efforts. We anticipate an improved credit demand and collection efficiency in the coming quarters.
Thank you. I hand over to Murli.
Murali Vaidyanathan — Senior President & Country Head, Liabilities
Good evening friends. As you would have seen in our presentation we have reasonably a good quarter in terms of RTD led retail franchise growing and backed by current account and current account is backed by ASBA as a proposition where we are getting into the insti ASBA as a solution and then we have savings account which is predominantly led by mass affluent and NRS segment. So I think overall our trajectory of keeping our focus on phygital is helping us to garner mass affluent and that is our elite proposition and to strengthen elite at this point of time.
We are going to launch two more products in the coming month which is to take care of semi urban and rural setups as well as one onto the HNI as a segment which we are going to call Elite Lite and Elite plus and that kept aside we also have strengthened our AD1 proposition through SCNR now and we are on the roadmap towards building our inward outward as well as prepaid forex during the quarter two. Now these are all important proposition at the level of institution and at the level of customer who actually is expecting range of products.
Today we have an entire range and gamut of liability products ranging from savings account and TD both showing us 18 and stable CASA ratio then we have backed with SIP. If you see the ADM growth year on year we are at close to 37 40% and that is also helping us to cater into protection that is insurance which is giving us the steady inflow in terms of health, general and life. So our proposition towards favor in terms of relationship management and investment is actually yielding us and today we have close to 40,000 active three in one accounts through our partner and we also have 50,000 ASBA which is actually given us first quarter throughput of thousands of crores.
Now as we inch up forward we are focused on product holding as an approach are we as an approach getting deeper into the family and most importantly getting the hook products and PH products as way of life. So I think our elite proposition strengthening and and we are going to enter the digital for mask through D2C which is called direct to customer for SA and TD which is coming up at this point of time. Overall we’ll try to sustain the momentum and grow from here on.
Thank you. Gopi?
G Gopalakrishnan — Head of Treasury
Good evening everyone. The past quarter was relatively favorable in terms of market movements particularly in government bonds.
RBI provided liquidity and monetary policy support owing to relatively softer CPI prints. This allied to the domestic economic relative resilience to geopolitical tensions played out in government bonds with Yield on benchmark 10 year softening by roughly 35bps. Government bond yields have instead of post the recently concluded RBA MPC which saw the committee decided to hold the repo rates. Various estimates predict the inflation is expected to remain within the RBA MPC’s inflation target and coming festive season will be keenly watched. Global central banks continue to diverge in their assessment of respective economies as the Fed continues to hold rates while other developed economies such as UK have cut rates recently for equities, currency and broader markets.
India specific tariffs announced by us, the full extent of which comes into effect end August continue to be source of concern with varying estimates as to the exact impact on GDP growth. These Factors will likely cause a bit of volatility across assets segments and we remain cautious in near term coming to Treasury. We commenced the FX business in Q line Q1 in line with the AD1 license granted by RBI. This allows the bank to offer various forex products on par with other commercial banks in the country. During Q1, treasury realized profit of 116 crores on profit on sale of investments. Thank you.
Vasudevan Pathangi Narasimhan — Managing Director & CEO
Back to the operator.
Questions and Answers:
operator
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and one on their Touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Darshan Diora from Indebtest Group. Please go ahead.
Darshan Deora
Yeah, thank you operator. So you know given the tough macro environment, I appreciate the steps the management has taken to steady the shift and I’m sure these steps will pay dividends. In the long run. Also appreciate the progress we are making on the current accounts as well as the successful tier 2 capital raise. My question is regarding the cost to income which came in at 70% versus 65% say for the same quarter last year. Can you give some guidance on what has driven this higher figure as well as how do you think we’ll end the year as well as what will be the guidance of the next two, three years on the cost to income front.
Dheeraj Mohan
Hi, Darshan Dheeraj here. So the cost to income, as you know the income side we have not grown fast enough because of largely interest reversals coming from micro finance and also disbursements being muted.
So as passed by and if you look at July numbers, I think growth momentum is back so items like fee income and interest income will start growing faster. So largely on the income side we will see a lot of positive correction. On the operating expense side we are looking at OPEX growth of close to 19% this year. Given that growth momentum is there and like Vasu said we are adding people on the front line. So you will see a bit of OPEX movement because of those but they’re again largely revenue linked. But I feel that 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.
So I think from a cycle cost to income would have peaked out of looking a little ahead even in our projections we are looking at let’s say two years from now our cost to income to be between 60 to 65% and that will reflect the last part of our investments we are making as a bank. And we’ve got some slides about the investment which are long term in nature. All of that should. That’s the last phase would capture that. From a short term I think we’ve hit the peak from a medium term is 60 to 65. Long term we are still. I think we’ll take some time before we give where we would be from a long term cost to income.
Darshan Deora
Got it. Thanks. Thanks. I appreciate the elaborate answer. My second question was regarding the housing finance. So you know obviously there’s a large opportunity out there. I know the company has been thinking about making some changes in our strategy. Wanted to know any updates in terms of the team or the strategy and whether we’re seeing any, you know, any early signs of success there.
Jagadesh J.
Hi, this is Jagdish. Regarding the housing finance. Yes, currently we had a growth of around 12% but we are looking at a growth of close to 20 plus in the current financial year and upwards in the long term. The current term we are looking at adding close to some 18 to 20 branches and another 30 spoke locations among our existing set of branches. So this will help us to show the decide growth and also we are focusing more on the semi urban and rural locations which will also help us to increase the yield.
Darshan Deora
Got it. And you know any additions we have done to the team in terms of the senior leadership on the housing finance side?
Jagadesh J.
No, no, we are not done that. We are only adding the branches. We are not going into the new geographies.
Darshan Deora
Okay, yeah.
Sridharan Nanuiyer
Leadership, everybody is there. So the, I mean the people are in place. So the whole addition is all about branch expansion and more people in the same brands.
Darshan Deora
Got it, got it. Appreciate that and again appreciate the steps the management is taking. Thanks.
operator
Thank you sir. The next question is from the line of Priyank Cheddar from Valloom Capital. Please go ahead.
Priyank Chheda
Yeah, hi. I hope I’m audible. So it has been a stressful times and in such times what as a minority shareholder we require is something internal to the bank which you can control. And I’m coming back to the same question which was in the earlier participant which is cost to income ratio. It is going to the root. That is question one. When how do we take care in the interim when there is so much of pain on the palant on the pnl? Why don’t we take some calls to cushion up the Profitability, that is question number one. And then I come back to the question number two.
Vasudevan Pathangi Narasimhan
Yeah, I mean it’s a good question, no doubt. Can we double down on the cost and you know, reduce the cost at a time when there is a stress in terms of provisioning? But if you look at the way the bank is set up, we do not really employ DSS or collection agents for sourcing or collection of installments. And in liabilities, of course we don’t. We are not even allowed to have DSS for deposit anyway. So most of the costs that we incur are of a fixed, you know, cost in nature, be it people, be it branch rental cost and things like that and the IT cost that has been invested.
So the variable cost is actually very little. You know, there are some businesses where we pay connectors for certain lead referrals for businesses. Only a very small part of our cost becomes a variable cost. So if there is a drop in business automatically that cost will go down to that extent. But the rest is all actually of a fixed cost nature. And if you look at the business also, you know, while of course the results are not very good and there is a loss that we have reported in the the first quarter because of higher provisioning, etc.
But if you look at the fundamental platform of the bank, we have 90% of our loans in secured book and the secured book is doing quite well. Whether it is in terms of growth, in terms of collection, efficiencies, etc. We don’t see really any issue in that except that in Karnataka and Tamil Nadu, as we have mentioned, there was a spillover effect of the microfinance stress because of the ordinance which got passed in these two states. There was some spillover effect in terms of the lower end of the lap book but again was a short, you know, short lived effect.
And even in July we have put out our net slippage for non MFI book which has come down to 2.19% from the first quarter slippage of about 2.6 odd percent. So basically the business is very strong from the non MFI side which is 90% and the micro finance which is of course 10% but causing a lot of pain is the factor that we have to deal with. And we all felt that the microfinance will improve sometime by the beginning of this financial year, but it has not turned out to be so. And but with the guardrail settling in and all people getting more disciplined in lending, we do expect that the third fourth quarter should improve in microfinance also.
So the challenge for the Equitas is really not in terms of how to cut, cut cost and control operating cost or reduce the cost but in terms of how do we just get our growth back. And we have grown by 8% in the first quarter. But as Jaggib mentioned we should look at about 15 16% growth for the full year on the overall book. And that is where the entire cost will get absorbed. And as Dheeraj mentioned in the short to medium term our cost to income should come back to that fixed 6 to 3% level.
Priyank Chheda
Okay, I take that sir, on non MFI book until last quarter we guided for a credit cost of 1% for the full year. Now I sorry I would have missed out. What is the changing in the policy provisioning norms that you have undertaken where you know the credit cost annualized annualized rate is around 2 and a half percent on a non MFI group. Help me with what is the credit cost that we should look forward for 26. What has changed and transferred versus last quarter to this quarter.
Vasudevan Pathangi Narasimhan
So our normal credit cost should be in the range of 1 to 1.2% for the non MFI book this quarter. You know we have made a. We have changed the provisioning norms in certain buckets which you can see in page. I don’t know which page, page six. We have made extra provision in certain buckets for the non MFI book. You know the purpose of that or the reason of that was because our MFA book is coming down. And because of that you know the overall provisions for the bank PCR from a PCR perspective will start going down. So we needed to increase the provisions in the secured book to keep the PCR up to a reasonable level. So this was a one time exercise that we have done. But short of that, yes, we should still stick to that one to 1.2% credit cost for the rest of the book.
Priyank Chheda
Sir, this is actually not one time it has happened second time in last whatever one and a half year. What we want to really understand is that till what times you know this provisioning norms will keep getting tightened internal to the bank. I’m sure it is good on the long term and hence we are the long term shareholders for the Equitas Bank. But we really want to understand on the non MFI book when would this provisioning tightening end and then we get back to the to the respectable pcr. So is that something which is yet to come more pain in the coming quarters or is this a max plan that we are looking at it?
Dheeraj Mohan
Hi, just to give you one perspective so that you don’t think this keeps repeating this 112 crores which is the non micro finance credit cost which we have done through strengthening the provision, its incremental impact will not be of the same magnitude because this is all when why we are saying it is one time, it’s on the stock. So incremental will be a much smaller number.
Vasudevan Pathangi Narasimhan
No, no, that he has understood. What he is asking is that is understood, is understood that this 1, 1, 2 is a one time because you are doing it on a portfolio basis incrementally only for that extra amount which comes into each bucket there will be that extra provisioning. That is understood. What is asking is you are saying that this is coming up for that improving the PCR because MFA is coming down. So PCR will go down because MFI is going down. And what is happening is in the future also will you keep tightening the internal, you know, provision norms from that 70% PCR perspective? That’s what he’s asking.
I think we don’t have that answer off the cuff now because I can’t really tell you yes or no to that question. What we can say is that we will have to look at this from time to time, time and time, the increase in provision norms, you know, properly and, but, but I think at least for the rest of the year, I am fairly clear we will not have to do it again for sure. Whether we’ll do it in the next year is something I am not right now able to predict with clarity.
Priyank Chheda
No problem. Thank you sir for that clarity. And just one last question on again MFI for the full year. Last year we undertook a credit cost of around 10%. Now in this year a normalized credit cost, additional upfronting of the credit cost all put together is another 11%. Right. So what I want you to understand is that the balance now because the book has run down, it’s been a one year whatever disbursement that we would have done in last whatever six months to nine months. I’m sure we would have taken all the prospects of the pain that overleveraging of the borrower had even would it be prudent to call out that this is the max pain in MFI book also?
Vasudevan Pathangi Narasimhan
Yeah, I mean that’s the purpose of taking that 185 crore of standard asset provisioning and microfinance in the first quarter, quarter to kind of call out that is this should be the peak of credit cost stress that we should nameify and you know, hopefully going Forward, we should be more normalized credit score for the subsequent quarters. The whole purpose is really only that that’s where we went for that, you know, standard asset provisioning. And in terms of the last six months business that we generated. Yes, I had mentioned that, you know, the collection efficiency in that is actually 99.6, which is, which is absolutely as good as what it used to be before all this crisis started.
And the second thing is there’s one more question.
Priyank Chheda
Okay, so for the full year, what would be the credit cost for this book that we should think of? Sorry. For the balance nine months. We know that it has happened in Q1. For the balance nine months, what should be the credit cost on MFI Book 10?
Dheeraj Mohan
We are expecting another, conservatively about 300 crores. We have made 400 and conservatively another 300 crores is what we are expecting.
Vasudevan Pathangi Narasimhan
Yeah, and the percentage is not the right thing because as you mentioned, the denominator has been going down. But as Jaggi mentioned, you know, he started disbursement again in microfinance on a calibrated basis. So you know, that will obviously reduce the percentage. But yes, to some extent the percentage is a little vitiated.
Priyank Chheda
So the 300 crores is for the balance next three quarters for this year. Okay, thank you, sir. Hopefully we come back more stronger in the coming quarters. Thank you.
Vasudevan Pathangi Narasimhan
Thank you. Thank you.
operator
Thank you, sir. The next question is from the line of Ronak Cheddar from Africa Capital. Please go ahead.
Ronak Chheda
Yeah, hi. Thanks for the opportunity. My first question is again going back to credit cost. You said that we are kind of upfronting the credit cost in the current quarter and although kind of improving the PCR for the full year, if I were to assume, if it says 600 to 700 crore ballpark for MFI and one one and a half percent, should your credit cost for full year of F26 be higher than F25? If the math serves right?
Dheeraj Mohan
Yes, it will be higher.
Ronak Chheda
Okay. And my second question is, in terms of your cost to income, in terms of our readiness to apply for your universal license, do we have to now add, Is there something from a readiness point of view where we will have to invest in processes, tech people or. That investment is largely done and we are kind of gearing up for our application.
Vasudevan Pathangi Narasimhan
There is no fresh investment required from that perspective at all. We should be able to apply next year. If we can continue to keep our GNP and NPA less than 3 and 1 for the March 26, then we should be potentially able to apply subsequent to that. But from an investment perspective, there is no further investment required.
Ronak Chheda
Got it. And the last question is on nii L item, I understand there is reversal in this quarter, but given the fixed rate nature of our book, how do you see the growth delta in the NII growth line visible with an AUM growth over next two years? Given the rate cycle is coming, the rates are coming down.
Dheeraj Mohan
Yes, I’ll. I’ll try to address that from a expectation on NIM rather than NII growth. So we what’s impacting NIM largely is the portfolio mix in MFI and also the interest income reversal. So these two are the largest contributors for the NIM drop. And as you see now, cost of funds is also moderating quite well. So I think in our expectation our NIMS should roughly hover around here for the given year even though we will get benefit of lower interest income reversal as asset quality picks up. But again we’re stepping on the pedal from growth perspective. So we at least we expect nims to hover around here for this year on nii. Yes, you are right. NII should grow faster theoretically as you start getting income from these assets and you get the full yield. But I think more expectation is NIM to remain where it is.
Ronak Chheda
Okay, just last thing on DPD movement in the non MFI book despite I understand you commented that it is in July, but the way to the moment from Q4 to Q1 is a sharp increase. So can you talk about where are we seeing these stress except for the ones we’ve already called out?
Jagadesh J.
This is majorly happens only on the Karnataka market. We had a sudden flow in the DPD that was the major impact we added in the DPD movement which we brought it under control which we can able to see in the month of July where the 1 to 90 DPD has come down both in MF as well as on the non MF book.
Ronak Chheda
Okay, thank you so much for answering my questions.
Vasudevan Pathangi Narasimhan
Thank you.
operator
Thank you sir. The next question is from the line of Ashleshee from Kotak securities. Please go ahead.
Ashlesh Sonje
Hi team. Good evening. Couple of questions from my side. If I look at the non MFI book, it’s like the.
operator
Sorry to interrupt you sir. Your voice is breaking.
Ashlesh Sonje
Can you hear me better now?
operator
Yes sir. Please go ahead.
Ashlesh Sonje
Okay, so if I look at the non MFI book on the basis it seems gross slippages are not released as sharply as the increase in net slippages.
operator
Sorry to interrupt you sir. Your voice is breaking.
Ashlesh Sonje
I’ll come back in the Day.
operator
Okay, so thank you sir. The next question is from the line of Somil Shah from Paris Investment. Please go ahead.
Unidentified Participant
Hi. Thanks for the opportunity. So what is our X market collection efficiency for microfinance for the month of July.
Jagadesh J.
It was around 99.14 on the 1 EMI with 1 EMI demand against the 1 EMI collection.
Unidentified Participant
So in the month of June I think it was 98.699.
Jagadesh J.
Yeah.
Unidentified Participant
So it has improved compared to the month of June.
Jagadesh J.
Yes.
Unidentified Participant
Okay. Okay. And how about Tamil Nadu and Karnataka?
Jagadesh J.
Tamil Nadu, we are at close to 99 and Karnataka has been improved from 96 to close to 97.44.
Unidentified Participant
Okay. Okay. So overall in all the, I mean states it’s improved even in Tamil Nadu.
Jagadesh J.
Yes.
Unidentified Participant
Okay. Okay. And so in previous calls I think we mentioned that by end of this year our ROA should be in excess of 1%. And FY27, our ROA is to be in the range of 1.5 to 1.8. So are we on track to achieve that or looking at the current order performance? We would like to revise our guidance.
Vasudevan Pathangi Narasimhan
Yeah, so as I think we still be able to stick to that. You know, the fourth quarter exit ROA for the fourth quarter should be around that 1% level.
Unidentified Participant
Okay. And for FY27?
Vasudevan Pathangi Narasimhan
FY27, it’s of course the early to predict that, but it will keep improving, that’s for sure. Because we definitely believe that MFI stress can’t continue beyond that. And if MFA comes back, then everything is back to normal. So we should see back to normal levels of ROA subsequent to that. So if the fourth quarter exit in ROAS around that 1% level, then you should see progressive improvement in the subsequent quarter.
Unidentified Participant
Okay. Okay. And so my final question, since our 100% of MFI disbursements are now covered under CGFMU, so can we expect from now on from here, I mean we will be stabilizing at this 10% MFI book or we can even increase this book.
Vasudevan Pathangi Narasimhan
Yeah, it is unlikely to increase because MFI growth will be always a little lower than the rest of the book growth. And to that extent it may not increase. But the sharp reduction that we have seen in the last two quarters may not happen.
Unidentified Participant
So I mean for us the ideal level would be what, 90 secured and. 10 mm.
Jagadesh J.
Around that. Around that.
Unidentified Participant
Okay. Okay. That’s it from my side. Thank you. And all the best.
Vasudevan Pathangi Narasimhan
Thank you.
operator
Thank you, sir. The next question is from the line of Anil Tulsiram from Best Pulse Research Adversary, please Go ahead.
Unidentified Participant
Yeah, thanks for the opportunity. My question is more to understand the strategy of the bank from next three to four years perspective and not looking for any number guidance. See first on microservices. My question is whatever reason I’ve understood the JLB business model, the JLC model has broken and now that group collections and group underwriting is not working anymore, anymore and we have to do individual underwriting and individual underwriting is definitely not possible for ticket friends lakh and VIP loans are definitely less than 1 lakh. So my question is why we want to be present into this MSI segment at all when the business model has broken or is my understanding wrong? That’s the first question.
Vasudevan Pathangi Narasimhan
Yeah, yeah, your understanding is correct. I am not going to say your understanding is wrong. The group lending model still exists and the people still assemble in the group. What is really not beginning to work now which used to work in the past in the willingness of the group members to pay someone else’s emi. When that person has, you know, not come to the meeting and requesting someone else to pay, they normally used to end up paying and then they will collect it between themselves subsequent later on. Now that is the one which is really not happening, you know now but the rest of the group model still works.
And you know, as we keep saying that you know our own microfinance strategies very clearly that we will that percentage of contribution of microfinance will come down over time. Except that last two quarters it was sharply down which will not happen. It will reduce in more marginally. But otherwise the rest of the group model still works because even today we are able to get about 50% of attendance at the center meeting which used to be in the normal circumstance around 70%, 70, 75%. So at least 50% are still turning up and making the payment at the group and leaving the rest of the members to be followed up individually.
And we’ll have to keep watching this. These are all evolving because now the MFIN guidelines, sorry MFIN guardrails have got implemented 2.0. Now people can’t borrow more than three loans and the total loans can exceed 2 lakh rupees. And if they have an overdue with anyone then no one else will be allowed to fund to her. So these are the norms which were not really properly followed in the. In the last 2023 and 2024. But now from Jan and from April, from April everybody has implemented from Jan, some of us had implemented. And when these three norms get implemented strongly by all the players, that is when the members will also start recognizing that they need to repay the money. If they want to be in the micro finance borrowing market, they need to also repay their money whether they do it at the group or whether they do it outside the group. So to that extent, I think this, the collective discipline lending of the entire industry is what can finally hold this group model going forward.
Unidentified Participant
My second question is on the OpEx, but I’m not looking for the cost income or any guidance. Where I am coming from is I don’t know, my understanding is right or wrong. For the size of our bank, I think we have too many products. So is it that the OPEX is high because we have too many products and when this product scale up, then the OPEX as a percentage of assets will automatically come down? Or is it just that the growth? So why exactly are OPEX as high as a business model? That is what I’m trying to understand.
Vasudevan Pathangi Narasimhan
Yes. So I think we have been investing in a few business lines over the last three to four years. Used car was one business that we started about three, three and a half years back. Affordable housing was another one which started around the same point in time. And both of them, I mean used car has been quite profitable even last year and this year also. But affordable housing last year was not profit making. This year it is just turned the corner in the first quarter. So hopefully it will start contributing more going forward. And then we had spent money on 81 and also we had spent money on credit cards.
So these two businesses, they have not started generating revenue. And this year they will start generating revenue. But the real revenue should come from these two products from the next financial year. So there is certain amount of investments we had made. And so that way the cost to income remained at a higher and elevated level. Of course the fact that microfinance book was going down and creating a higher level of slippages impacting income reversal was again a major factor. If that had not happened, if that had not happened and if micro finance had continued under normal patterns, then our cost income should have been in the range of 62, 63, 64%.
Somewhere in that range is where it should have been. Given the investments that we have been making in other products because of that MFA issue, it has gone a little elevated. But once the MFI comes back, naturally it will produce higher level of income. And so the cost income should come down. But as going forward, as Dheeraj had mentioned slightly earlier, you know, in the short term we should see the cost income at around this level. But in the medium Term we should see it getting back to that 60 to 65% level.
Unidentified Participant
Okay. One follow up question on the micro finance is my understanding right that now that you so the collection cost will go up drastically for the balance for not coming to the group and RBI has been specializing that the rates cannot go up beyond the cost and structurally it looks like the credit cost of the LFI segment has increased. So without going into the numbers, can you say on a sustainable basis the profitability on the microconducts has come down compared to the before proceedings.
Vasudevan Pathangi Narasimhan
Structurally I think again you are right. Structurally I think the MFI, the profitability, the ROAS and the ROEs that MFA used to generate in the past, I think at an industry level we will start getting used to seeing it at a more normal level. And over time, you know, the returns on micro finance may be only equivalent to that of secured loan books, just slightly adjusted for the unsecured risk exposure. So it will get. It’s probably little bit more than what a typical M lab or a secured loan lab can produce just adjusted for the unsecured credit part of it. Otherwise the earlier situation of, you know, higher levels of roi, ROI I think is something that, you know, at the industry level we’ll all start probably getting used to not having that kind of stuff going forward.
Unidentified Participant
Thanks a lot. Thanks a lot for your answers and wishing you all the best. Thank you.
Vasudevan Pathangi Narasimhan
Thank you.
operator
Thank you sir. The next question is from the line of Ashlesh Sonji from Kotak Securities. Please go ahead.
Ashlesh Sonje
Hi team, I hope you can hear me any better. Now two questions from my side. If I look at the NP recoveries and upgrades in the non MFI book, that metric seems to have worsened quite a bit in this quarter. If you can shed some light on which segments or sub segments and which regions are contributing to contributing to this worsening, that is one. And secondly, I heard you say that the credit cost guidance for the non MFI book should be around 1 to 1.25%. This, this seems very different from what we used to indicate earlier for the entire book. If I go back a couple of years, we used to say that the overall credit cost should be around 1.1 to 1.2%. Now we are giving a similar guidance for the non MSI book. So what has resulted in this change in expectation? Those were the two questions. Thanks.
Vasudevan Pathangi Narasimhan
Okay, I leave the first question to Jaggi to answer. In terms of geography, region wise, where do we see stress on the non MFI book? As far as the credit cost of the non MFI book is concerned and the overall credit cost of the bank is concerned. You are right. You know when we became a Bank in 2016 and then for the brief while that post demonetization if you remove that impact for about a year impact then from 2018 to 2020 where there was no external factors at play. Again our credit cost at the bank level used to be around the same 1.2, 1.1, 1.2 1.25% which comprised of, you know, more or less equal kind of thing kind of credit cost between MFI and non mfi.
But now what we feel is that the non MFI will still continue to be at the same 1 to 1.25% level. But the MFI could be at a different level. MFA could be different with what we feel it can be. I mean earlier we used to say, you know long back before all this crisis it used to be 1 to 1.5% credit cost. Subsequent to demonetization we thought that 2 to 2 and half is a more normal credit cost for microfinance. Post corona we thought around 3% is a normal credit cost for microfinance. Now post this 2024 over leveraging crisis probably anywhere between 3 to 4% could be a normal credit cost for a microfinance.
So if you take that way and if I assume that 10% of our book will be microfinance then we are really looking at 0.3 to 0.4% credit cost once micro finance settles down and becomes normal and then 1 to 1.25 from the other. So you can potentially then look at one and a half percent as a credit cost at the bank level. I leave Jaggi to answer the okay.
Jagadesh J.
Regarding the non MFI slippages, there are two programs products which we added slippages compared to the previous quarter. One is on the vf, other one is on the SBL book. But VF you normally see it’s a seasonality will be there. For the Q1 we cannot make a comparison with Q4 but when you make a comparison with the Last financial year Q1 actually the slippages which much more lower Both for the 1 to 90 DPD as well as on the GNPF range. So we don’t see much of problems as far as the VF even though the slippages compared to Q4 were higher.
But if you look at the SBL part as in the clearly mentioned in the call that even the due to this ordinance we had an impact even on the mortgage loans on the lower ticket sizes less than 10 lakhs. So we have been comfortably having a expected efficiency of close to 99 percentage in Karnataka which has dropped down to 96.2 in the month of February. So currently we brought it on to almost close to 98.4 in Karnataka. But those slippages which contributed majorly in the Q1 so the maximum slippages happened. SBL is on the from the Karnataka region and this is primarily on the booth l ess than 10 lakh ticket size which is the Micro Lab and G Lab products.
Vasudevan Pathangi Narasimhan
Hello.
Ashlesh Sonje
Thank you.
Vasudevan Pathangi Narasimhan
Okay. Thank you.
operator
Thank you. Well ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. P.N. vasudevan for his closing comments.
Vasudevan Pathangi Narasimhan
Thank you. Thank you all of you for attending this call and you know and highlighting areas for focus for the bank and for the management. Thank you so much and see you again next quarter. Bye bye.
operator
Thank you. On behalf of Equitas Small Finance Bank Ltd. We concludes today’s conference. Thank you for joining us. And you may now disconnect your lines.