EQUITAS SMALL FINANCE BANK (NSE: EQUITASBNK) Q3 2025 Earnings Call dated Jan. 31, 2025
Corporate Participants:
Vasudevan P.N. — Managing Director & Chief Executive Officer
Dheeraj Mohan — Head of Strategy, Investor Relations, BI and CX
Analysts:
Rajiv Mehta — Analyst
Kamal Mulchandani — Analyst
Palak Bhatt — Analyst
Shailesh Kanani — Analyst
Ashlesh Sonje — Analyst
Manik Bansal — Analyst
Amit Mantri — Analyst
Presentation:
Operator
Ladies and gentlemen, good evening and welcome to the earnings call of Small Finance Bank Limited’s financial performance for Q3 FY ’25. We have with us today Mr P.N, MD and CEO; Mr Shridharan N, CFO; Mr Murali, Senior President and Country Head, Branch Banking, Libilities, Product and Wealth. MR. Rohit, Senior President and Head Assets; Mr Natrajan M., President and Head Treasury; Mr Dhiraj Mohan, Head Strategy. 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 the conference call? Please signal an operator by pressing star then zero 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 P.N. — Managing Director & Chief Executive Officer
Thank you, and over to you, sir. Thank you. Good evening to all of you, and thank you for dialing into this call. I would like to talk about two items, first which Diraj, our Investor Relations and Strategy Head will talk about the rest of the business. I would like to talk about the stress in the MFI sector, which is an immediate focus to start with. And after that, I would like to touch upon the fundamental strategic platform that we have been building for the bank from a medium to long-term perspective.
Microfinance portfolio was behaving normally till March ’24. During Q1 of this year for the first time in Equitas, we saw the expected collection efficiency slip marginally from the normal levels of about 99.4% to about 98.9%. However, it was believed that this was due to the combined effect of heatwave on the general elections in April, May of ’24. And so the industry and us included were quite caught by surprise when the collection efficiency dipped further in Q2 for no apparent external reasons.
In our case, it dropped from 98.9% of Q1 down to 98.2% in Q2. And when this happened across geographies, it was clear that an important reason for the stress was as much internal as external. Around 10% to 15% of customers availing loans from more than three lenders and even going up to five, six lenders were common earlier also. While this caused some level of stress, it was still very much within tolerable limits as there was an infin norm that all lenders put together, the loan cannot exceed INR1.05 lakh. However, this cap was removed effective Jan ’23 for reasons that we all know and it was not replaced by a norm, but a general amorphous cap of something in the range of around INR2.25 lakh kind of backwards from the fire norms.
Somewhere during the calendar year 2023, because of this change, the actual amounts borrowed by the customers had gone up probably at a pace which was too rapid and this was also reflected in the strong growth in the industry during that point in time. But while we know all of this and we have an idea of the players and the amounts involved, I believe that what is not really understood or clear is also there is some kind of a parallel lending happening to the same set of borrowers by so-called app loan companies.
When I visited some of the customers to understand the level of leverage, I often saw that they had taken a many small loans from app-based lenders. These loans were typically small in the range of INR5,000 to INR25,000 rupees, yet with short repayment, the monthly EMI does work-out to some decent size. And probably this is adding further to the kind of stress that the customers are facing in terms of our leveraging. So we may have to see how at the industry level, we get all lenders to the segment to somehow fall in-line with the MFN guardrail stood at zero, that’s been rolled-out effective Jan of this year.
In our portfolio, we have seen that X bucket efficiencies stabilized in Q3, but this is not really enough. We have put in many initiatives and hope to see an improvement in the same over this and next quarter. Because of a six-month lag between ex-bucket slippage and eventual credit cost, we should see elevated credit cost in NFI for this and next quarter also arrasing out of slippages in the second and 3rd-quarter of this year.
Depending on improvements in the efficiency, we might see in Q4, based on that, we should be able to predict some level of moderation in credit cost hopefully from Q2 or Q3 of the next financial year. And of course, as we speak, we are also aware of certain recent developments in Karnataka. So the outcome of that anyway needs to be assessed as the picture unfolds there. In terms of diversification, in Equitas, we started the journey of diversifying from 100% microfinance book to other forms of lending, basically secure forms of lending way back-in 2011.
Presently, we have about 14% of our portfolio in microfinance with the rest being secured. We would continue on this path and expect to see the share of microfinance going down into single-digit shortly. Micro loan against property or MLAP is a product which we had introduced again way back-in 2012, 13. This is basically for funding small businesses from INR2 lakh to INR7.5 lakh rupees secured against our property. We have completed two cycles of this product, which is typically a fire loan product.
Out of about 2.3 lakh customers, we have financed MLAB over the years, we have had to take legal recourse to repurpose the property only in about 690 cases. And out of this, we actually had to sell the house only in 23 cases, while the rest have either settled by the customer themselves or it’s work-in progress. This shows our ability to underwrite properly and also determine the right amount of loan that these customers would be able to borrow and repay. The MLA product addresses typically the 15% of the top-end of the MFI customer segment.
We have rolled-out special emphasis on this product during this year, resulting in the disbursement in MLAB doubling during the year. Further emphasis is being given with an objective of trying to replace as much as possible the rundown in the MFI books by the MLab book. Now I come to the second part of what I wanted to cover, which is a medium to long-term strategic positioning of the bank. Our objective has been to build a stable, sustainable and scalable business model over the years.
As per this on the lending side, we have now built a secured book of about 86% of the portfolio comprising of small-business loans, affordable housing, used vehicles and MSC finance for working capital. All these businesses have large unmet credit demand and address the requirements from the informal sector borrowers. Banks by and large have been absent from these markets for all these years. And given our strength built over the years, we do have a very strong competitive edge in this space.
These products have been credit tested over the past decade through multiple headwinds such as GDP slot of demonetization, corona, etc. Or in — through all those headwinds, the credit cost for all the rest of the products have remained within a very acceptable narrow range. Affordable housing finance, which is also having a comfortable JNP and credit cost has yet to breakeven being a new product but contributes 12% to the portfolio. This is expected to turn black next year, which should hopefully help improve the overall profitability of the bank.
We have launched, as I mentioned earlier, liability to strategy toured out zero during the current year. The objective is to improve stickiness of depositors, which will in-turn enable us to reduce the interest rates that we offer and reduce the differential between us and the large banks in terms of interest rates over a period of three to five years. On the liability side, most of the standard offerings are already in-place such as investment options, trading, as per and bill payment. On the asset side, affordable housing used cars were the only ones that we could offer till now.
This quarter, we have rolled-out personal loans for deposit customers and credit cards for deposit customers will go-live by March. Based on the level of product consumption by depositors, we will take calls on reducing our interest rates and deposits. During this year, we have changed twice the interest rates on certain slabs of savings accounts, yielding a reduction of about 13 basis-points in savings account interest cost. We also reduced our peak TD interest-rate during Q3 by 25 basis-points.
For the next three to five years, as we reduce our cost of funds, we should be able to further improve the quality of our borrowers. And given the large unmet credit demand from these customer segments, we should be able to sustain healthy growth with quality. To sum-up, the bank is going through the short-term impact of the stress in its microfinance portfolio. However, the platform on which the bank has been built remains robust and strong and we should be able to sustainably and profitably grow this over the next few years.
I’ll now hand over to Viraj for taking us through other business numbers.
Dheeraj Mohan — Head of Strategy, Investor Relations, BI and CX
Thank you, Vasu. Good evening to all of you. As you all know, Equita operates at the grassroot of the economy and predominantly deals with the informal workforce on the lending side, while seeking deficits from the mass and mass-affluent segments. In our limited perspective, we are seeing a marginal uptick in economic activity, continued tightness in liquidity, limited growth in household incomes, robust credit enquiries across segments and overall tightening of credit norms.
At Equitas, we operate across eight lines of business, which are our liability franchise, the treasury business, which we set-up in 2016; small-business loans, vehicle financing, microfinance and micro loans, affordable housing, MSE Finance and NBFC Finance. Our deficit franchise currently stands just north of INR40,000 crores and registered a healthy growth of 26%, backed by strong growth in retail term deposits of 31% in a challenging environment. Our CASA remained stable at 29% and we saw some uptick in current account balances.
However, growing SAR or savings account balances continues to be a challenge as depositors prefer parking money in term deposits given the uncertainty of when the interest-rate cycle may turn. Our total retail deposits, that is retail TD and CASA stands very healthily at 73% to the overall deposits. Our LCR stands at 184.8% and CDA ratio comfortably at 88.6% as of December 2024. The NRI business continues to attract depositors and is laying the foundation for the soon-to-be launched AD1 business. The wealth and third-party distribution business is also moving along well.
Today, we process around 33,000 SIPs and have handled a volume of close to INR20,000 crores in during this year. 3/4 back, and this is also what Wasu had mentioned in his opening commentary. We had spoken about liability 2.0 strategy. The strategy focused on two aspects to give Equitas a strong competitive edge in the long-term. Firstly, we aim to bring our cost of mobilizing down through operational efficiency and improved productivity. And secondly, to narrow the cost of funds gap between Equitas and large universal banks and also get it a notch lower than the AAA-rated NBFCs.
To achieve this, it was critical that the bank developed a wide range of products and services to cross-sell and create stickiness among deficitors as well as — sorry, leverage technology to improve customer experience and service. Over the past few quarters, we have focused on putting this in-place. With the launch of credit card personal loan and soon-to-be launching AD1 services along with products like car loans, housing finance, services like digital Focus, wealth management,, etc for savings account holders.
We now have a strong proposition to build a loyal and sticky customer-base. We are hoping all of this will help us in our liability 2.0 strategy mentioned earlier. These initiatives have also given us room to revise our SAR rates and drop our peak FDA rates by 25 basis-points. However, we are being very watchful and cautious given the current liquidity scenario. The rate revision has translated into a drop-in the cost of SAA by 13 basis-points and our FD cost should see some moderation in the coming quarters. This has helped keep our cost of funds stable at 7.49% despite raising INR500 crores in Tier-2 bonds during the quarter.
As the deficit franchise matures and we acquire good-quality deficitors, the focus is now on leveraging our customer-base for cross-sell opportunities. Work is going on to strengthen this with data analytics through propensity models, digital marketing and active customer engagement. On the technology front, we have had a few important rollouts. Our new scalable state-of-the-art CRM has gone live across branches. This is helping us service customers digitally, leverage biometrics for instant paperless servicing and track customer journeys from lead to conversion to servicing.
Our proprietary cloud-based loan origination platform for personal loans and credit card is live and will aid in cross-selling initiatives too. The much-awaited revamped mobile banking application is being rolled-out to customers as we speak and initial feedback has been very encouraging. We hope all of you who have accounts with us give it a try and share feedback with us. We will now embark on creating a Super App platform that will significantly enhance experience depositors will have with the bank.
On the treasury business, we made INR39 crores from profit on-sale of investment and the team now manages a book of INR9,500 crores. Our SLR book stands at INR8,300 crores as on end of December. Moving to other lines of business on the asset side, our advances has been — our advances growth has been soft with a growth of 14% year-on-year as microfinance continues to degrow. Our secured book or non-MFI book grew 20% year-on-year, led by robust growth in 20 — of 27% in small-business loans. The bank continues its strategy to focus on higher-yielding projects like Microlab, use commercial vehicle loans and car loans. As a result, gross yields on advances inched up 6 basis-points quarter-on-quarter despite a slowdown in microfinance.
I will take a few minutes to give you a quick update of some of the major segments. Small-business loans, the bank’s flagship product, which started over 12 years back, continues to grow well, clocking a 27% growth in advances year-on-year with an average ticket size of about INR7 lakhs and a semi-urban focus, it is the most profitable book of the bank. The GNPI continues to hold well at 2.34% and we see no signs of contingent from microfinance spilling over. The business operates from over 200 branches across 12 states and the bank plans to expand its network in Andhra, Telangana, Karnataka in the coming year. We have provided more granular deficits in our PPT2.
Coming to vehicle finance, the overall growth has been slow at 14% as we continue to defocus on new commercial vehicle loans. As we anticipated a negative market cycle to play-out in the SCV segment. However, our UCV book has grown steadily at 19% and used-car loans clocked a strong healthy growth of 55%. Our overall loan book is now INR1,700 crores for cars. Our VF business operates out of 260 odd branches and continues to enjoy a long runway for growth given the level of underpenetration. The book is largely small and light commercial vehicle focus and targeting FTU and FTV segments. We are now seeing growth to come in the used heavy commercial vehicle segment in the coming quarters.
Our affordable housing book now is INR4,500 crores and we continue to invest in broadening its network by leveraging our existing branches with an average ticket size of INR12 lakhs and an NPA of 1.36%. This book remains healthy and has also seen improvements in yield during the year. We are now focusing on improving profitability of this book as the business — as the business matures. Other products like MSC and NBFC brands continue to remain small and the business growth is determined by how the interest-rate cycle plays out in the coming months. On overall asset quality parameters, we have seen a good improvement in net slippage as a trend — as it trend downward from Q2.
Net slippage for Q3 is 3.15% compared to 3.31% in the previous quarter. Improvement came in as net slippage in the microfinance book improved — considerably from 2.28% in Q2 to 1.11% in Q3. However, MFI continued to deteriorate as net slippage climbed sharply from 8.31% to 14.16% in Q3. The 1 to 90 DPD at the bank level also improved 47 basis-points as additional initiatives were taken to improve collections in MFI. We also added close to about 1,000 employees largely in MFI during the quarter.
Coming to the overall financial performance of the bank in Q3, the balance sheet has grown 22% year-on-year and is now above the INR50,000 crore mark. Margins remained under pressure at 7.39%, a decline of 33 basis-points, mainly due to the drop-in the MFI business mix and drop-in treasury yields. Credit cost came in at 2.65% as we utilized INR38 crores from the INR100 crores stressful provision created in the previous quarter. GNPA closed at 2.97% and NNPA at 0.96% as we focus on getting the bank in-line with the universal banking guidelines for. Lastly, the bank registered a PAT of INR66 crores with an ROA of 0.53% and an ROE of 4.44%.
I thank you all for patiently listening to me. Now we’ll — the operator can open the call for questions.
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 1 on their touchstone phone. 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. Our first question comes from Rajiv Mehta from YES Securities. Please go-ahead.
Rajiv Mehta
Yeah, hi, good evening. Just a question on the X bucket collection efficiency. You can share the latest numbers across products in-vehicle Finance, SBL and MFI and whether have you seen further improvement in January versus December?
Vasudevan P.N.
The ex-bucket, as I mentioned here in my opening remarks was 98.2% for the 3rd-quarter and it was at a similar level in the second-quarter, while it was 98.8 or 98.9% in the first-quarter.
Rajiv Mehta
Yeah, sir, but this is MFI alone, right?
Vasudevan P.N.
That’s right for the MFI.
Rajiv Mehta
Correct. And other product?
Vasudevan P.N.
Expert I mean that’s I don’t know whether that’s so relevant because I don’t even have the data immediately.
Rajiv Mehta
Got it.
Vasudevan P.N.
Yeah. But typically the MFI is very critical to measure X bucket because the percentage of collections that we do out of X bucket flow-in microfinance is much lower. In other products, so generally the collection efficiencies are much higher in the bucket and so the eventual flow into NPA is not that much. So X bucket is an important parameter that’s measured internally, but we don’t share it with investors. Sorry, we have given that. What is this?
Dheeraj Mohan
Product-wise we say what?
Vasudevan P.N.
Okay, sorry, it’s there in page internal number. Okay, okay. Yeah, that’s right. So we do have this data from our internal review purposes, but it’s not that relevant, so we don’t share it with the market. Microfinance, we told you because it’s very relevant.
Rajiv Mehta
And can you also share the quantum of disbursements now you’re doing on a monthly basis in MLAP?
Vasudevan P.N.
So it’s 125 crores. It’s about INR150 crores right now
Rajiv Mehta
Monthly in MLAP, right?
Vasudevan P.N.
That’s right, monthly segmently. And that’s what as I mentioned, that’s a focus. Now the target is to try and see how that can be taken to next level. Because you know, the MLAB was introduced by us about 12 years back for the top-end of the microfinance borrowers. We have done study long back. About 15% of the microfinance borrowers we determine were people who are you entrepreneurs by choice, people who got into business by choice and they were able to scale-up and manage their business better and required funds to grow their business more.
So basically MLAB was introduced to address the top-end of the MFA customers long, long-time back. And so now what we are doing is we are getting the same MFI team to work with our current set of customer-base of NFI and try and penetrate MLAP to the top-end of the MFI borrowers. And as the MFI loan book keeps coming down, the objective is to try and see how much of that can be filled by MLAP. So currently, the disbortion is about INR150 crores a month and going-forward, we should see how to scale that up further.
Rajiv Mehta
And sir, this net slippages being lower in the non-MFI products. So what would have driven this much higher levels of upgrade and recoveries, say, in-vehicle finance or SBL portfolios in this quarter because the macro backdrop was not very conducive. So what do you attribute this higher recovery and upgrades in these portfolio to understand?
Vasudevan P.N.
See, basically, the 3rd-quarter generally is better than the second-quarter normally. And so even our retail, our SBL businesses and all that, they really did quite well in the 3rd-quarter. Now if you see upgrades and recoveries in Q3 was about INR300 crores compared to INR216 crores in the second-quarter on more or less a similar level of — no, the addition was INR505 crores in the second-quarter on which we were able to — this is for microfinance or non-micro finance. This is the bank. No, we are talking of non-microfinance the talk of non microphones. Show-me that yeah.
So here you see page number slide 23. Slide 23, we have put certain data. If you can go through Slide 23 later on, you will find out what’s been the gross slippage and also the upgrades and the net slippage in the non-micro finance portfolio. And so the non-microfinance portfolio, the gross slippage, the net slippage was at similar levels to 200 maybe 200, which is non-micro cement net slippage in non-MFI was INR84 crores for the quarter and for the previous quarter, it was INR160 crores. So there has been a significant improvement in terms of the upgrades, right, and net slippage really reduced. See, basically, the 3rd-quarter is always a good quarter and 4th-quarter should be generally even better normally. So we should really hope for something even better in the 4th-quarter.
Rajiv Mehta
And can you just ask one last question please?
Vasudevan P.N.
Okay. And yeah.
Rajiv Mehta
And on this credit cost, sir, so now that the bucket is still elevated at the bank level, SML 0 and what is improving, so we will have follow-through slippages. In MFI in particular, do you plan to continue providing at 75%, 80% on the incremental slippage because your current PCR is 77% and whether you further utilize the remaining INR62 crore of that stressed sector provisions that you have created on the standard loans.
Vasudevan P.N.
So that usage of that balance of buffer provision on standard assets in microfinance will depend on how the bucket — that FMA buckets move-in the 4th-quarter. I mean, so internally we had some norms to arrive at that INR100 crores in the second-quarter basis that now there was a release of INR30 crores, INR30-odd crores in the 3rd-quarter. But so it depends. I’m not going to be in a position to say whether we use it in the 4th-quarter or not. It depends on how that the bucket portfolio comes out in the 4th-quarter.
As far as the first question that you asked
Rajiv Mehta
No, no, it was related to whether we’ll keep continuing to provide 75%, 80% or in other side
Vasudevan P.N.
Because what happens is our NPA norms provision, we changed it during the year for microfinance, right? We kind of increase the provision norms. And that will continue. I mean, that’s something that we are not — actually we are not allowed to change it frequently. Once you change your provision norms, it will have to be on a — on a consistent basis. So that will continue.
Dheeraj Mohan
Except the 91% to 150 100%.
Vasudevan P.N.
Yeah, 91% to 150, we are providing 50% and 150 plus, we are providing 100% and that will continue.
Rajiv Mehta
Okay. Thank you so much and best of luck.
Vasudevan P.N.
Thank you. Thank you.
Operator
Thank you. The next question comes from Kamal Mulchandani from Investec Capital Services. Please go-ahead.
Kamal Mulchandani
Hello. Thank you for the opportunity. Firstly, sir, I would — I was seeing in the PPD that PPOP two assets is decreasing from last five odd quarters. So when do we see an improvement in the PPOP to average assets rate going-forward?
Dheeraj Mohan
Yeah. So the — see, the factors impacting it is largely the proportion of microfinance we have on the book. So as microfinance is a high-yielding book and in good times, it’s very, very profitable. You’re seeing that impact play-out. And directionally, we have also mentioned that we want to bring down microfinance in the long-term to some single-digit number. And to counter our this movement is why we are growing Microlab and focusing on products which of similar, let’s say, internal ROA or internal profitability.
So the whole challenge we have and we started this like two quarters back, I think is when we mentioned this that we are growing the micro lab book. So the whole challenge we have is to bring back PPOP despite readjusting the bank for a lower MFI book. So today, it’s a little distorted given that microfinance is dropping much faster and disbursements are fairly muted. So you’ll have to give us some time till the storm passes and we think that it will take another one or two quarters for us to get that clarity. So have patience till then, but these are the factors which are impacting the people, it’s largely that single-product, which is disturbing it.
Kamal Mulchandani
Got it, sir. Also, sir, if you could just help us like what would be the blended ROA for the secured book for book.
Dheeraj Mohan
See, this is now how internal products are looked at is there’s a transfer pricing, which happens to each of these products. So when we tell you an ROA, for example, we say that the ROA of SBL, let’s say, for example, is 4% or 5%, it has a transfer pricing element of what we charge each business on their — on their borrowings. So it’s really not easy for you to understand. All we can say is SBL is extremely profitable and there are standalone NBFCs which do similar businesses and the numbers are very, very comparable.
So that you should actually do a sum of parts. So what similar vehicle finance companies do or what similar small LAP NBFCs do. We are not a way of any of them. We are extremely comparable. So if you — and then the denominator is between assets and of a bank and assets of an NBFC. So if you just adjust for that, you will actually get a better picture. But our internal ROE numbers actually will make no sense. We’ve given you yields of these products largely. You know the cost of funds of the bank. The cost of liability, I think we’ve mentioned it somewhere is about 2.5% is the cost of raising deposits. So you have to adjust for all of that. So it’s not a very straightforward answer. But the easiest way is to look at standalone NBFCs and do a sum of parts of Equitas.
Kamal Mulchandani
Okay. Okay. And also like what we are trying to do is that trying to understand that how the bank would again go back to a 2% or more than 2% — a 2% ROA in the near-future, taking into consideration that we are not increasing the share of our MFI book or even we’ll try to reduce our MFI share further. So like just wanted to understand that if we’ll sacrifice on our MFI book, will it affect the ROAs of the entire bank as the secured segments are still not contributing much to the profitability?
Vasudevan P.N.
Yeah. So as I mentioned, as mentioned, some of our secured loan products are quite old products and so they contribute well to the profitability of the bank. So typically your small-business loan, which is about 42% or above and the used vehicles where the used commercial vehicle and the used cars which together contribute about 17% 18% of the book and the 2%, 3% of the NBFC loan to NDFC. All of these are you know, profitable at normal level because they have been around for enough time and so they are profitable at very comparable levels.
What is still not broken even is our new products like affordable housing and the MSC that we are doing. So these two have what 12% and about 4%. So about 16% of the book is still to breakeven. And the new commercial vehicle, the new small commercial vehicle, which is about 5% or 6%, that’s just at the bottom-line. So you are talking of really this 20%, which is either just at the bottom-line or yet to breakeven.
So these are products which will probably start breaking even and contributing to the profitability maybe in the subsequent years and that is when the overall profitability of the banks can go up as these new products start contributing to the bottom-line. So microfinance, as I said, will go down and to that extent its contribution to the profitability will obviously go down. But some of these products like affordable housing and MFC, which have been around for the last three, four years, as they breakeven and they start contributing, hopefully some of that burden should be taken by that.
Kamal Mulchandani
Okay. Thank you so much, sir. That’s it from my side.
Vasudevan P.N.
Yeah, thank you.
Operator
Thank you. The next question comes from the line of Palak from ICICI Securities. Please go-ahead.
Palak Bhatt
Yes, sir. Thank you for giving me the opportunity. So wanted to know that the SMA
Vasudevan P.N.
One and not clear.
Operator
You’re sounding muffled.
Vasudevan P.N.
Yeah.
Palak Bhatt
Am I audible now?
Vasudevan P.N.
Yeah, that’s better, better.
Palak Bhatt
Yeah. So the question was that for the SMA zero and SMA-1 for the MSI book has seen some improvement in Q3 as compared to Q2. So do you think that this is sustainable or do we think that further improvement is still expected for the coming quarters?
Vasudevan P.N.
Yeah. So you are right. The SMA zero was 2.17, it has improved 2.03 and SMA-1, which is 1.7 has improved to 1.5. However, if you see SME 2 or which is — which was 2% has actually shot up to 2.73% in the 3rd-quarter, right? I think this is slight number, I don’t know. Yeah, 25, slide number 25.
See, basically, the SMA-2 has shot up because that’s an effect of what happened in the second-quarter, right? The X bucket flow-in the second-quarter will lead to an increase in NPA towards the end of 3rd-quarter, which is where we see the SMA going up and eventually part of that will move into NPA in this quarter. But SMA is zero and one, the improvement that we see is because as I mentioned between Q2 and Q3, the X bucket stabilized even though it’s not at a comfortable level, 98.2% is where it stabilized, but 98.2 is nowhere near comfortable.
You know at anywhere around 98.6%. Around that, we — the MFI will actually breakeven, meaning the credit cost that we lose and the income that it generates will kind of match each other and the product will breakeven. But if you’re at any X bucket less than 98.5% or 98.6% or somewhere in that range means that the credit cost will be higher than the income generator. So net, the product will be a negative contributor. So this first sign of improvement in SME 0-one is nice, but it’s really not enough. And this quarter, we have to see why is our X bucket going to be and that will determine what will be the potential cost that we may incur over the next two quarters.
Palak Bhatt
Okay, understood. And if you could even touch upon that what kind of expected collection efficiency have you seen for the month of Jan for the MSI book?
Vasudevan P.N.
For the month of Jan, we are almost at the end-of-the month, of course. So we will not be able to tell you clearly because there’s still a few hours left for the business to wind-down, but it’s very similar to the last quarter, very similar. So it’s not — it’s not shown an uptick. That’s for — that’s clear. It might end-up very close to the last quarter. But then there was lot of holidays this month, hopefully February and March, less holidays, all this become — have become such a big issue today that a set of holidays can tweak your performance, but that’s the way it is. So January was more or less in-line with Q3 and February, March is something that we’ll have to watch out for.
Palak Bhatt
So as I had mentioned in your opening commentary that maybe Q2 or Q3 of the next financial year, you would see some improvements to 98.6% ex-bucket collection efficiencies expected by Q2 or Q3 of next financial year. Right?
Vasudevan P.N.
No, sorry, that’s not what I mentioned. What I mentioned was that if the X bucket goes up in the — in this quarter, that’s the 4th-quarter and if X bucket also improves in the first-quarter of next financial year, then what happens is the credit cost — see basically credit cost is a six-month lag impact, okay. From ex-bucket efficiency to credit cost is a six-month lag impact. So if my 4th-quarter of this year, X-bucket improves, then in the second-quarter of the next financial year, we might see credit cost moderating, okay. That’s what I mentioned.
Now what I also mentioned is that since the second and 3rd-quarter collection efficiencies have been low at 98.2%, it means that I will have an elevated credit cost in the fourth and first quarters. That’s a given because the expected was — already has happened. So the elevated credit cost for this quarter and next quarter is a given. Now whether Q2 and Q3 of next year will be better is based on this quarter and next quarter’s ex, which is where the whole focus is and that’s what I have referred to.
Palak Bhatt
Thank you. Thanks. Thanks. Thanks thank you.
Operator
Thank you. The next question comes from Shailesh Kanani from Centrum Broking. Please go-ahead.
Shailesh Kanani
Good evening, everyone, and thanks for the opportunity. Sir, my first question is with respect to disbursement. So in MFI segment, we have seen around 17%, 17% 18% decline year-on-year. When do we expect this to pick-up? And if you can throw some light in terms of our guidance as well, because we had withdrawn the guidance earlier, are we giving any guidance with respect to FY ’26 as of now.
Vasudevan P.N.
So microfinance disbursement, you know, will continue to be a little bit moderated only because the comfort to go all-out is really not coming yet. So the disbursement will continue to remain subdued. In terms of overall growth — advances growth, we have done about 14% for the nine months period. The non-micro finance has grown by around 20%, the microfinance has degrown by 11%. So overall, it’s about 14% for nine months. But if you ask me for a guidance, it’s not going to be easy because the disbursement in microfinance is still something that I’m not in a position to predict because if the comfort improves, obviously, the more money will go out. If the comfort remains low, then the disbursement will also remain low. So for the moment, we are really not giving a guidance on that.
Shailesh Kanani
Sir, second question is on the on the on the UCV front, are there even including affordable housing, though it’s a small base for us. But are there any early signs of increasing delinquencies or collection efficiency going down because that is getting reported in certain parts of the country.
Vasudevan P.N.
See, the collection efficiencies of commercial vehicle has actually improved in the 3rd-quarter compared to the second-quarter. And typically, the 4th-quarter is generally a very good quarter, both in disbursement and collections. So we expect that to continue — that trend to continue as far as commercial vehicle is concerned. As far as affordable housing is concerned, again, our collections have been very very good. Our NPA continues to remain very much under control and the credit cost is very at a comfortable level. And it’s not small. You just mentioned that it’s a small part of the book. Actually, it has become 12% of the book. So it’s not small any longer. And so the — there is no concern as far as credit quality is concerned in affordable housing either. Only thing as I mentioned is that it’s not yet broken even. And this year it might come very close, but next year it should actually be positive, it should be flat and that is where it should start contributing to the ROA of the bank next year.
Shailesh Kanani
Okay, that’s useful. Sir, just last question from my side. Okay, is there any improvement in softer market resolutions and we have kind of increased our collection team, I assume, with 1,000 people coming in. So has there been improvement and how is the trend?
Vasudevan P.N.
Yeah. So basically, we have increased the feet on-street on microfinance. I think nearly about 800 of that of the 1,000 are deployed in microfinance. And this deployment has happened in the 3rd-quarter. And so I’m also waiting to see the impact of the benefit coming in the 4th-quarter and first-quarter of next year. The — the soft bucket resolution, which is that SMA 01 and 2 resolution, in the 3rd-quarter, it was not very different from second-quarter, but most of the people have been joining towards the end-of-the 3rd-quarter. So it was too early. Even now as we speak, people are still joining and they are just getting trained, they are getting certified and then they are putting — being put on the field. So the real benefit we should see only going-forward.
Shailesh Kanani
Okay, sir. Thanks a lot.
Vasudevan P.N.
Thank you.
Operator
Thank you. The next question comes from Ashlesh Sonjay from Kotak Securities. Please go-ahead.
Ashlesh Sonje
Hi, sir. Good afternoon. Sir, firstly, can you just share a breakup of the net slippages in the non-micro finance book, especially across vehicle finance and SBL, both for this quarter and the previous quarter, if you can, please.
Vasudevan P.N.
Product-wise
Ashlesh Sonje
Yeah, vehicles and been
Vasudevan P.N.
Product-wise?
Dheeraj Mohan
Yeah. We’ll try to say — actually we’ll try to see how do we incorporate it in the next quarter’s presentation.
Vasudevan P.N.
Okay. So this — we don’t have that now and so we’ll try and put it into our next quarter presentation.
Ashlesh Sonje
Sure, sir. No problem. Secondly, sir on the MFI disbursements, they have gone up sequentially. The question on it is at what juncture during the quarter did you feel like ramping-up disbursements and what exactly gave you that confidence?
Vasudevan P.N.
Actually, that was a — that was a kind of outlier. October was a kind of an outlier in the disbursement in microfinance. You know, in the second-quarter we were disbursing approximately about 350 odd crores a month-in microfinance, it shortly was about INR950 crores, right? So that’s about INR315 crore INR20 crores a month-on an average in the second-quarter.
3rd-quarter, the October month was a sudden outlier. The disbursement was about INR500 plus crores in the month of October alone, but then November — December came back to normal level. That’s why you see the blip in 3rd-quarter. But that is not something which is going to be repeated. And so we should see, I mean, as I said earlier to the previous call also, we are not in a position to predict the disbursement in microfinance because it depends on the comfort and the performance portfolio behavior, et-cetera, et-cetera. But that October was an aberration and we don’t expect that to happen again.
Ashlesh Sonje
Understood, sir. And any specific reason for the October month being an?
Vasudevan P.N.
Yeah. I think what happened is that, you know, at the branch level, they were kind of holding back certain disbursements in the second-quarter and some of them which were being held back were actually released in the month of October. So that’s why the average was there.
Ashlesh Sonje
Understood, sir. And just lastly, out-of-the total microfinance and micro loans book put together, what proportion of it would be to borrowers who are qualifying as MFI? And what proportion of the MFI book is qualifying technically as microfinance
Vasudevan P.N.
Micro-finance and micro loans like a proportion.
Dheeraj Mohan
Micro loans is about 30% now. Now it’s come to about 30% of that book. And micro 70% is microfinance. Microfinance 70%, micro loans is 30% of the book.
Vasudevan P.N.
Both are JLG products. Products are exactly the products. Micro-finance is about 70% of the micro total book and the micro loan is about the balance 30%.
Ashlesh Sonje
And micro loans is essentially those borrowers where the household income is could be beyond INR3 lakh.
Vasudevan P.N.
That’s right. Absolutely.
Ashlesh Sonje
Understood. Perfect, sir, those were all the questions I had. Sorry, if you can just repeat again if you have shared the provision policy for the MFI book on a DPD basis
Dheeraj Mohan
On DPD basis, 91% to on DPD basis, 91% to 150%, 50%. Let’s all know the standard, all the doubtful is 100%.
Ashlesh Sonje
Okay, thank you.
Vasudevan P.N.
Thank you.
Operator
Thank you. The next question comes from C.A. Manik Bansal from Master Capital Services Limited. Please go-ahead.
Manik Bansal
Hello. Hi, sir. Thank you for this opportunity. So my question is on small-business loans and lab. So what are the respective yields and average ticket size over there.
Dheeraj Mohan
Yeah. SBL average yield is about 16% 16.5%. Is part of the SBL book. So Microlab will be closer to 20%.
Manik Bansal
Okay, so average ticket size is
Dheeraj Mohan
Yeah so 7 lakhs below is what we classify as micro lab so if you look at slide 21 it will give you the SBL product mix. So today, Microlab is about 13% of SBL. So SBL is actually a collection of products.
Vasudevan P.N.
See SBL, the average disbursement size is about INR8 lakhs. You can see that on slide number 21, SBL is about 7.9 lakhs is the average disbursement and the yield on that entire book will be in the range of around 16% to 16.5. Within that, if you look at MLAB, MLAP, the average ticket size should be in the range of around INR3 lakh rupees and the yield on that would be somewhere in the range of INR22 because we have MLAP going from 20 to INR24 based on different category, different credit filters, etc., it ranges, but the average should be around.
Manik Bansal
Okay, okay. Thank you. And another question is like what percentage of book is linked to NCLR because as there is a lot of buzz going on the RBI rate cut. So what are the levels the bank the bank is going to use to keep the NIM stable or increase it.
Vasudevan P.N.
See, we have almost 80 odd percent of the book which is a fixed-rate book. Only the remaining is floating-rate. Our floating-rate is typically all our affordable housing is all floating-rate and part of the small-business loan is also floating-rate. The rest is all fixed-rate and all our floating rates are linked to external benchmark, which is a repo rate. So whenever the repo rate moves, it will also move-in tandem with that. So last to two years, we actually seen a benefit because the repo rate had moved up so we saw a benefit.
And going-forward, in case the rates start coming down, then that portfolio we should see a reduction in rate. But as far as the remaining 80-odd percent of the book is concerned, that’s the fixed-rate book. And so actually on the 80% of the book, we saw a negative impact in the last year and a half because the cost of funds had been going up, but we were not in a position to pass it on to the old borrowers. So we are actually having a negative impact on our NIM. Going-forward, just in case the interest-rate cycle reverses, then 80% of the book will continue to earn at the same level, whereas the cost of funds will start coming down over a period of time. So that will be a positive impact on NIM. So we are also eagerly waiting for when the interest-rate cycle will reverse.
Manik Bansal
Okay, okay. And the last question is like which segments according to you are the highest-growth contributors for the bank?
Vasudevan P.N.
See, for us, the flagship product is a small-business loan because it is sitting on a very-high level of unmet credit demand from the market and it can sustainably grow around the 25% to 30% level. We have been doing it for a long-time, so we do know-how to handle that product the competition from the mainstream banks is not high because the product is inherently difficult to handle and we have a lot of competitive strength built-up over the years. And that product has seen all kind of headwinds starting from GDP cycle growth, GDP cycle is going up-and-down, demonetization happening, corona happening, it’s seen all kind of headwinds, but the credit cost in that has never gone out of hand, never, ever gone out of hand. So that remains our flagship and will continue to be the high-growth product for the bank.
This next one will be our used commercial and the used-car, which is also used commercial, of course, is 12, 13-year-old product in the bank. Used-car is about four years or maybe four, 4.5 years-old. And both of them also will remain a flagship growth product for the bank because they tick all the parameters. Affordable housing will be a third focus product for the bank because it performs very well from a credit quality perspective. Only thing is that it’s still not contributing to the bottom-line and hopefully next year it should start contributing. But it takes very strongly on the credit quality. So that will be a third focus product for the bank.
Manik Bansal
Okay. Okay. Thank you. Thank you so much.
Operator
Thank you. The next question comes from Amit Manthri from 2.2 Capital. Please go-ahead.
Amit Mantri
Yeah. Can you — there has been any change in the yield on — that has been charged on the microfinance loans.
Vasudevan P.N.
See, earlier we used to have a flat rate. Now towards the end of last quarter and this quarter, we have introduced a flat-based rate. So the rate starts from 20% and goes all the way to 25%. So it depends on the profile of the borrower. So people who have been with us for two cycles, three cycle, four cycle, etc, they get a lower rate, people whose past track-record has been very good with us, they get a lower rate, people whose attendance at center meetings have been beyond certain minimum level, they also get a lower rate and so on. So we have defined a few set of credit parameters. Those who took — take all the boxes can get rates as low as around 20% and those who don’t take any of the boxes will go at the highest slab, which is around 25%.
Amit Mantri
So what would be the impact of this introduction of slab by system of rates going-forward will the average interest-rate on microfinance loans decrease because of this change?
Vasudevan P.N.
Yes, it should. So we did try to do some simulation on that and I think it might reduce the yield on microfinance by anywhere around 1% and a half.
Amit Mantri
100 basis-points to 150 basis-points basically.
Vasudevan P.N.
That’s right.
Amit Mantri
Okay. Thank you very much.
Vasudevan P.N.
Thank you.
Operator
Thank you. The next question comes from Rajiv Mehta from ES Securities. Please go-ahead.
Rajiv Mehta
Yeah, sir, just a couple of follow-ups. Sir, even affordable housing disbursements, the traction is still lower in terms of run-rate versus last year. So there was supposed to be a pickup, but we haven’t seen that pickup in Q3. So Q3 number of Q3 figure for disbursement is also lower on Q-on-Q basis. So what is happening here? And when do we see going back to the levels of disbursement which we were doing last year and get even higher subsequently.
Vasudevan P.N.
Yes. So the disbursement in Q3 is lower than every other quarter. It’s lower than Q2, it’s lower than Q3 of last year also, correct? Yeah. Lower than Q3 of last year. It’s lower than Q2 of this year also. It’s only better than Q1. Q1 was a very bad quarter, it’s only better than Q1. Basically in affordable housing finance, our disbursement yield, there is a conscious effort by the team to improve the disbursement yield in the affordable housing space. And you know we had initially our whole affordable housing started from Gujarat and then Maharashtra.
And subsequently, we came down to south and we put up operations in Tamil Nadu, Karnataka and APT. And so the team’s effort in their effort to try and improve the yield of the of the disbursement in affordable. They actually took a call to slow-down part of the disbursement from West and try and improve the disbursement from South. And that’s why you see the disbursement coming down. But in return, the yield had actually started going up even in the 3rd-quarter. And going-forward, so the focus will continue to be try and have a blended yield between South and West between self-construction to flat purchase to builder purchase.
So there has to be a proper mix amongst our customer profile as well as property profile to ensure that our yield is maintained while growth is also taken care of. So that’s a come — that’s a kind of fine balancing that the team is trying to do and that resulted in this dip in the 3rd-quarter, but hopefully, they will be able to come out of it maybe even this quarter.
Rajiv Mehta
And just on Slide number 26, you mentioned about additional provisions and I think you’ve also mentioned — I mean it’s mentioned — mentioned India that there is a INR60 odd crore of additional provision during Q3. Now what — so where-is that INR16 odd crore of provision I mean, is it in the PCR of MFI or — because you’ve actually utilized the standard funding provision that you created last year. So what do you mean by this additional provision of INR16 crore done in Q3?
Dheeraj Mohan
And the additional provision is in respect of the bucket — the provisioning changes in the bucket of MFI from 151% to 180 earlier, we are providing 73%. We started 100% now in Q1. Let’s say incremental provision in Q3. In Q3 FY ’24.
Rajiv Mehta
Okay, okay. And that’s a change in policy itself now. So even on a continual basis, 150 plus will be 100%.
Dheeraj Mohan
See, this is a change in — change from the bank policy of earlier follow. So it will be consistently followed in the future.
Rajiv Mehta
Understood. Yeah. Okay. Okay. Thank you and best of you.
Operator
Thank you. Ladies and gentlemen, we would take that as a last question for today. I would now like to hand the conference over to Mr P. and for his closing comments.
Vasudevan P.N.
Yeah. So thank you. Thank you all for dialing-in and listening to us and asking us questions and helping us to understand our business better. And look-forward to meeting all of you guys again next quarter. And hopefully the performance also should be much better than what’s happening now. Let’s hope that the market stabilizes, market settles down, customers come back to more normal levels of behavior and things do get back to some level of normalcy. Thank you and wish you all the very best. Bye.
Operator
Thank you. On behalf of Equita Small Finance Bank Limited, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines. Thank you.