EQUITAS SMALL FINANCE BANK (NSE: EQUITASBNK) Q3 2026 Earnings Call dated Jan. 30, 2026
Corporate Participants:
P. N. Vasudevan — CEO and Managing Director
Sridharan. N — Chief Financial Officer
Jagadesh. J — Head of Assets
Murali Vaidyanathan — Senior President and Country Head for Branch Banking, Liabilities, Products, and Wealth
Gopalkrishnan. G — Head of Treasury
Analysts:
Chetan Gindodia — Analyst
Rahul Kumar — Analyst
Pratham Chandgothia — Analyst
Deepak Poddar — Analyst
Ashish Agarwal — Analyst
Shreepal Doshi — Analyst
Ashlesh Sonje — Analyst
Vivek Ramakrishnan — Analyst
Jignesh Shial — Analyst
Anand Dama — Analyst
Presentation:
operator
Foreign. Ladies and gentlemen, good morning and welcome to the earnings call of Equitus Small Finance Bank Limited financial performance for Q3FY26. We have with us today Mr. P.N. vasudevan, MD, CEO Mr. Sridharanan CFO Mr. Jagdish J, Head of Assets Mr. Muralali Vaidyanathan, Senior President and Country Head Branch Banking Liabilities, product and wealth Mr. Gopal Krishnan Ji, head treasury Mr. Suresh, head strategy and business intelligence Mr. Sundar Aramandi, head investor relations and Mr. Abhishek, specialist investor Relations. 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 then zero on your touchstone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. P.N. vasudevan. Thank you and over to you sir.
P. N. Vasudevan — CEO and Managing Director
Thank you. Good morning to all of you and thank you for taking your time out to attend this call. I am happy to start off by. Saying that many of the initiatives we had talked about a couple of quarters back have started yielding results in microfinance initiatives such as rolling out the monthly repayment mode with EMI still the 15th of the month which forms around 63% of the book today. Focus on acquiring new to credit and new to bank customers who have lower leverage and reducing caseload per staff, combined with improved lending discipline in the industry and strict implementation of MFIN guard drills by all the players have resulted in significant improvement in performance of this book. The ex bucket collection efficiency on a POS basis has moved up to 99.4% in December and the percentage of book slipping into NPA over the last few months has seen a sharp reversal.
Microfinance today contributes about 8.5% of the total advances excluding the direct assignment purchase of MFI Agri pool that we did in Q3 and we aim to keep this microfinance at around the 10% of the advances level on an ongoing basis. All other businesses have shown continued improvement. Small business loans which showed some stress in in Karnataka specifically maybe about two to three quarters back has seen a significant improvement. Overall delinquency in SBL has come back to near normal. Disbursement also has been picking up and portfolio quality across all parameters have shown good improvement over the last quarter.
This enables us to continue growing this book strongly on an ongoing basis. Other businesses are also doing well and Jagdish will cover those More in detail on liability, we had 18% growth in deposits in Q1. We had to take the pedal off the deposit growth to prevent excess liquidity in the system. But we ended up with just a 7% growth in deposit in Q3 and now need to increase the momentum on deposit growth to support the increased advances growth morally would cover steps being taken to bring the deposit growth back to the earlier levels. The cost of funds has been coming down and presently stands at about 7.13.
It’s expected to go further down before stabilizing as more of the old deposit gets replaced with lower priced new deposits. In terms of capital adequacy, we are placed comfortably at about 20.47% capital requires ratio. During Q3 we took some initiatives to conserve capital such as increasing the IPPC outstanding from 1250 crores to 2000 crores as well as getting about 1690 crores of vehicle finance covered under CGT MSC Guarantee Scheme. This not only supports us in terms of credit cost in the future, but also releases capital to the extent of the guaranteed portion of the principal.
With these initiatives continuing into the subsequent quarters along with better internal accruals that we expect to generate going forward, we do not expect a capital expansion requirement in the first half of the next financial year. We will review the situation in the second half and take a call at an appropriate time. We have delivered a better than expected ROI of 0.65 for Q3 after taking into account around 29 crores of impact due to the new labor code implementation. But for this one time impact the ROA would have been in the range of around 0.8% and cost income would have been at about 70% level.
We have guided for a 1% exit ROA for the fourth quarter and we believe that we are in line for delivering that. On advances growth we have guided for a 15% growth for the year against 12% growth in Q3. That is I am talking of without taking into account the DA purchase in Q3. You know, along with the DA purchase advances growth has been 16% in Q3, but if I remove the DA purchase it is 12% in Q3 and we have guided for a 15% full year growth and we believe that we should be in line to deliver that overall with the impact.
You know we had a big impact in the income in the last two years because my MFI portfolio mix which was 20% in March 24 was dropping over the last two years to reach 8.5% now. So there has been a drop in income impact that we have seen over the last maybe six quarters or so. But with that kind of coming to an end and the microfinance 8.5% expected to stabilize around the 10% contribution level and the rest of the portfolio seeing all round improvement, we believe that we are well positioned to deliver consistent and improving performance going forward.
Thank you. And with this I hand over to Sridhar.
Sridharan. N — Chief Financial Officer
Thanks Vasu. Good morning to everyone. Thank you for joining us today for the Q3 FY26 earnings call of our bank. I appreciate your continued interest and support. Let me take a few minutes to walk you through the financial performance for the quarter. Most of these details are also available in our investor presentation. We reported a net interest income of 852 crores and other income of 285 crores bringing our total net income to 1137 crores for the quarter. Total net income grew by 8% y on y and 14% on q on q. NIM has significantly improved by 43bps q on q basis to 6.72% in Q3FY26 as compared to 6.29% in Q2FY26.
The bank reported a PAT of 90 crores, a growth of 36% y on y and 273% q on q. This is after making a one time incremental provision of 29.5 crores due to the implementation of new labor law codes in Q3FY26. Return on Assets and Return on Equity for Q3FY26 were at 0.65% and 6.1% respectively. In terms of asset quality, gross NPA reduced by 20bps q on Q at 2.62% in Q3FY26 as compared to 2.82% in Q2FY26. Net NPA reduced by 7bps q1Q to 0.88% in Q3FY26 as estimated to 0.95% in Q2FY26. Credit cost also has reduced to 1.88% in Q3FY 26 as compared to 2.16% in Q2FY26 and 2.65% in Q3FY25.
Our provision coverage ratio remains healthy at 61.1% and we expect credit cost to taper down by Q4FY26. Moving to the advances book, gross advances grew by 16% year on year to 43,268 crores driven by robust disbursement. The disbursement for the quarter stood at 6,557 crores with a strong momentum in across all verticals. On the liability side total deposits grew 7% year on year to 43,668 crores and our CASA ratio remained stable at 30% and retail deposits now constitute 73% of the total deposit base. As of 12-31-2025 our capital adequacy ratio stood at 20.47%. This is handing over to Jagdish.
Jagadesh. J — Head of Assets
Good morning to all. On the asset business for the quarter three we had demonstrated a notable improvement compared to the performance in the preceding two quarters. This positive momentum was predominantly driven by the growth in non microfinance segments and a strategy of risk calibrated expansion and also the shift towards the certain product segment contributed significantly to the overall better results for the quarter. Let me walk you through some key highlights. On the advances front we have grown 16% year on year and 11% quarter on quarter. This is primarily driven by the healthy uptick in disbursements.
Microfinance and micro loan advances includes purchase of agri assets under direct assignment deal of 1343 crores. Excluding this direct assignment deal overall bank Advances grew by 12% year on year and 7% quarter on quarter. On the disbursement front we have delivered the highest ever quarterly overall disbursement of 6557 crores which is a growth of 28% year on year and 22% quarter on quarter and microfinance disbursement has surged 72% quarter on quarter to 1173 crores in this quarter helping us to maintain an MFI portfolio at around 9% of our overall advances mix. On the non MFI front we have delivered our highest ever quarterly disbursements of 5,385 crores in quarter three which is a growth of 35% year on year and 15% quarter on quarter.
Our non MFI which is a secured book now stands at 38,108 crores marking a 19% year on year growth. Our small business loans which continues to be a largest contributor growing at 14% year on year and notably the secured business loans saw a robust 22% year on year growth. And on the vehicle finance our strategic focus remains on the used CVs and used cars. Our used commercial vehicles grow at 23% year on year and used cars posted a strong 36% year on year growth and on the affordable housing we grew at 17% year on year and 6 percentage quarter on quarter at 5360 crores on the MSC book we grew at 35% year on year and crossing 2000 crores.
Microfinance portfolio excluding DEA stands at 3800 crores and it expected to grow driven by the improved disbursements. On the yield and asset quality front the yield and Gross advances declined by 10bps quarter on quarter to 15.63% primarily due to the lower contribution from the MFI mix. On the non MFI Yields it’s declined by 9bps quarter on quarter to 14.97 mainly due to the portfolio recalibration. On the asset quality Net sleep significantly reduced to 2.52 in quarter three down from 3.78 in quarter two. We reported the lowest net slip pages for the bank in the last six quarters.
Credit costs saw a sharp decline to 1.88% compared to 2.16 in quarter two of the financial year. 26 in microfinance 1290 DPD improved significantly to 2.14 down from 5.40 in quarter two. This is driven by the enhanced collection efficiency as stated earlier. For our current financial year we are fine with our stated advances growth of about 15% year on year. This is excluding the DEA driven by the improved disbursements. Thank you and I will now hand over to Mr. Motley.
Murali Vaidyanathan — Senior President and Country Head for Branch Banking, Liabilities, Products, and Wealth
Good morning. Thanks to you all for joining this call. While the numbers are there let me.
Take you through some numbers which is. Very important for all of us to get a grip of things. Last quarter we did rate tweaking strategically because that was an opportunity available for us as we strengthened the proposition across mass affluent affluent and HNA as a segment. So our cost efficiency in terms of interest payout came through three different things. One is on savings rate, second is on TD rate and then duration shifting from 444 to 888 as an opportunity. So that has helped us to bring the overall cost of funds down that is one side but absolute SA which was at 6.08 as we started the year on April is today somewhere at 5.1 as we exited quarter three and TD which was at 8.48 today is at 7.3 which means close to 95 bids on TD on repriced book of 65% of the portfolio and importantly shifting the consumer from 444 to 888.
Last quarter we did close to 1 10,000 customers who had 444 in last six months to be very precise month on month migrating into 888. So there is a conscious effort to build the quality in terms of duration, bringing down the price. Enhancing the proposition has been our core driver and our family banking proposition which we spoke about. We have now close to 30,000 families of elite. And to expand that elite into next level we are creating a product for Mars supplement which is called Elite Light which has gone live. And we are also getting into HNI program called Artha which should go live today, tomorrow.
So the important message what we want to tell is we want to strengthen our relationship management. We want to move from only rate conscious approach to value proposition. And third important thing is how what more can I do to the consumer? So as a proposition we are strengthening the product distribution and relationship and focused on three clear specific segments on NR. Our SCNR has gone live. We have crossed 2022 million worth of $. And we will be launching our pound based FCNR next week. And we are seeing a good trajectory at this point of time.
And we predominantly at this point of time we are only focused on giving it to our existing customers. And so is our inward remittance gauntlet. So AD1 almost through in terms of that. And we specifically launched a product for seafarers and this is meant for only shippies and which is started well last quarter and we launched it. And this quarter we have launched a program for NR also which is specifically an elite. So elite as a proposition is going to be what we want to call as house of elite entry for mass affluent, affluent and then hni.
This is going to be our approach in terms of our specific focus on Saab car. We have some distance to cover. We are coming out with a merchant program as well as asset centric approach which we will elaborate later on next quarter. Now last but not the least gold loans from the branches signs are very encouraging. In line with markets I think we are disbursing close to 100 to 120 crores a month on a steady state basis. This should only go up presently we are focused as a cross sell activity and some point of time in the next year we will have it as a focused activity in terms of new to bank sourcing.
Also with this I hand over the phone to Gopi who will give some treasury insights to us. Thank you all.
Gopalkrishnan. G — Head of Treasury
Thank you Murali. Good morning everyone. Markets remain extremely volatile dominated by global trade and geopolitical uncertainty. Indian equities and rupee markets have underperformed versus global pace. This has mainly been caused by foreign investors exiting equity investments with further pressure on account of returns being impacted by rupee depreciation. Domestic CPI is expected to remain within the MPC inflation target. Upcoming budget will be closely watched with the market seeking further cues for government stimulus to strengthen growth.
Government bonds market saw the benchmark 10 year yields stay roughly flat during the last quarter and closed at 660. With overall system liquidity remaining tight and pricing in no further rate cuts, Benchmark yields further went up during current month. More recently, RBA has announced steps to infuse system liquidity with borrowing rates for banks and corporates spiking in the past few weeks. We continue to be watchful in the near term with heightened volatility becoming the new normal. Coming to Equita Specific treasury income stood at 34 crore in Q3FY26. Thank you. Back to 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 the 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 Chetan from Mahindra Manulife Mutual funds. Please go ahead.
Chetan Gindodia
Yeah. Hi sir. Thank you for the opportunity. The question is in the other income line item do we have any income from sale of erc sale to ARC or any other one off income could be there because sequentially it has changed jump quite a bit.
Sridharan. N
Yeah, this Sridharan here. Yeah. Other income include the one time of. Arc income of 28.25. Sorry, 31.52 crores.
Chetan Gindodia
Okay, okay. And with respect to credit cost, if it is possible to share any sort of guidance, how do you look at credit costs for us in Q4 and year ahead? Because the slippages and most of the book for us including SPL and NFI have started performing in line with your expectations. So any light you can share on that?
Sridharan. N
As you clearly stated the net slippages was the lowest among the last six quarters and it was on the downward trend. So it clearly indicates that even the credit cost will be on the downward trajectory for Q4.
Chetan Gindodia
Okay. Okay, got it. And TD with lastly with respect to TD resizing so how much of a total book would have repriced as of now and what quantum of book is left to reprise and how much in terms of cost of fund one can further expect and sort of decline. Yeah,
Sridharan. N
60% of the existing book has got repriced and another 20 is due for this quarter. Balance will slip into the next quarter and we are going with already, as I said, we have tweaked the rates in line with better than market and at the same time in line with RBI. We are one cycle behind. As of now we have saved 98 bits. As I said earlier on the new price book of the existing portfolio.
Chetan Gindodia
Got it. Thank you. And all the best.
Sridharan. N
Thank you.
operator
Thank you. The next question is from the line of Rahul Kumar, Mumbai Korea fund. Please go ahead.
Rahul Kumar
Yeah, hi, just one question. What is the PCR coverage ratio which you are comfortable with and what is the trajectory of NIM over next few quarters?
P. N. Vasudevan
The PCR ratio, it’s around 67% today we are reasonably comfortable at those levels. Around that level is something that we are fairly comfortable with as far as. The NIMS are concerned. You know, we did have a sharp jump in the NIM basically because microfinance has stopped de growing and for the first time I think actually it grew quarter on quarter from a portfolio perspective. But now micro finance is about 8.5 or 9% of the total book. We expect that to remain at that 9 to 10% level. That’s our stated objective. And because of that we do not expect a downward pressure on NIM any longer because of MFI going down and the rest of the book continues to grow. Well, so we should expect our NIM to be.
I mean, I think our NIM is more or less where it will be. Maybe it may marginally tick up a little bit, but somewhere around this range is where we expect it to be.
Rahul Kumar
Okay, okay. And other expense in this quarter has increased pretty sharply versus last quarter. So what has driven that?
P. N. Vasudevan
Is it labor code stuff? So there are two things. One is that there’s been an increase to disbursement happening in the quarter which there is a certain amount of cost associated the disbursement. And second is the 29 crore of one time impact because of the labor code.
Rahul Kumar
Okay. Okay.
P. N. Vasudevan
Yeah. So if you see the cost to income is 72%. But if that labor code impact is kind of netted out, it should have been 70% actually. So that was a big impact in the quarter.
Rahul Kumar
Okay.
P. N. Vasudevan
Thank you.
operator
Thank you. The next question is from the line of Partem from 361 Capital. Please go ahead.
Pratham Chandgothia
Yeah, hi. Thanks a lot for the opportunity. So my question is again on margins given that, you know, the cost of funds should trend downward from here on because you know, we have repriced our term deposits and also rationalized our SaaS. So, and just in your previous comment, you guided that, you know, next. Yeah.
P. N. Vasudevan
The voice is unclear.
Pratham Chandgothia
Yeah, yeah.
P. N. Vasudevan
Can you please repeat? The voice was not here.
Pratham Chandgothia
Yeah, hi, sir. So. So my question was on margin, given that, you know, we have rationalized our deposit rate, shouldn’t, you know, the margins expand from here at least in FY27 because, you know, we’ll still have the cost of funds benefit. That was my first question and my second question was in terms of sbl, when you say that, you know, it is normalized. So should we expect the slippages around these levels within the SBL portfolio? Yeah, those are my two questions.
P. N. Vasudevan
Okay. Okay. So on the first point, let me take that. Yeah, I mean there are certain drivers in place for expansion of nim. One is that the cost of funds is expected to trend down a little bit more over the next two to three quarters because of the repricing of whole deposit to the new deposit. So that the cost is definitely expected to go down, which could be one, one driver for NIM expansion. The second driver for NIM expansion is that microfinance is 8.5, but we want it to be around the 10% level. So that one and a half percent increase in the MFI portfolio mix could be another contributor to NIM expansion.
But on the other hand, NIM contraction perspective, if you look at it, our lending yields, the disbursement yield is likely to come down a bit given the overall interest rate scenario in the market. So we may also have to fall in line with that and there may be some little bit of, you know, disbursement yield drop. So that will be the negative side from a NIM perspective. So if you combine all of this, that’s what I said in the earlier question, asked that, you know, from 6.7% that we are in currently, we may expect it to move marginally up a little bit.
But right now we are not actually in a position to guide exactly where it will go and where it will stop. But definitely we don’t see it going down, that’s for sure. It might marginally go up in the next few quarters on the sbl. I’ll ask Jaggi to talk.
Jagadesh. J
So on the net, SLP edges or SBL, if you look at between Q2 and Q3 itself, it has gone down from 2.49 to 1.46 in Q3. So the net slip page is an indication of both x bucket and 1 to 90 dpds. If you look at the x bucket efficiency of SBL, we are at 99.3 which has improved from 99 from Q2 to Q3. Similarly on the 1 to 90 dpds also almost close to 100 crores we have reduced in actual value. And in terms of the percentage, it has gone down from 7.53 to around 7.3.
So based on combining both these factors, the net slip pages will go down in Q4.
Pratham Chandgothia
Sure. Thanks. And this is my last question. The FBL portfolio, your PCR is around 27. How comfortable are you with that PCR?
P. N. Vasudevan
How comfortable are you? We are very comfortable with this one because in the substandard is the one thing actually. And we did some ARC sale and because of that it’s come down actually. Okay. And in addition to that, we are not only in terms of the comfortable, we are not even putting the provision based on Iraq norms. We have even, let’s say an example in certain DPDs between up to 455, we just require a 25 percentage PCR coverage. Whereas we are, we are putting almost close to 75 percentage epidemics for 455. So we are comfortable with that being a secured book.
Pratham Chandgothia
Sure, sir. Thanks a lot.
P. N. Vasudevan
Thank you.
operator
Thank you. The next question is from the line of Deepak Podar from Sapphire Capital. Please go ahead.
Deepak Poddar
Yeah, I’m audible, sir.
operator
Yes, sir, you’re audible.
Deepak Poddar
Yep. Thank you very much for this opportunity, sir. So I missed one number you mentioned. So in third quarter, what was the ARC income you mentioned?
P. N. Vasudevan
31.52 crores.
Deepak Poddar
It’s included in which line item 16.
P. N. Vasudevan
It’s line number 34, asset fee income. It is included in that
Deepak Poddar
Come again
P. N. Vasudevan
slide. Number 34, asset fee income.
Deepak Poddar
No, no, I’m saying which PNL line item. I mean it’s, it’s a part of other income.
P. N. Vasudevan
Yes, yes, yes, yes.
Deepak Poddar
Okay. Okay, understood. And you mentioned 31.5 crores, right? 5, 2.
P. N. Vasudevan
51.52 crores. Yeah.
Deepak Poddar
Okay, understood. And on the PSLC, I think this quarter we were close to around 34 crores. Right. PSLC income. So how should one look at going into fourth quarter? Generally in fourth quarter PSLC income is generally higher.
P. N. Vasudevan
That is treasury and PSLC fee income. So it’s largely Treasury PSLC income there. During the quarter
Jagadesh. J
we have not done any PSLC sale.
Deepak Poddar
So there was none.
Jagadesh. J
Only treasury income.
Deepak Poddar
Okay. And fourth quarter, any PSLC income we are expecting?
Jagadesh. J
Doubtful. Because you know, Q3 we actually had to buy agree portfolio from some of the MFIs to meet our PSL AGRI requirement. So we had to actually buy because we are in shortfall. But with micro finance disbursement picking up, we expect that in Q4 our own internal business generation should be enough to meet our PSL requirement. Doubtful. That we may have excess which we will be able to sell. Doubtful.
Deepak Poddar
Okay, I understand. And in terms of your deposits, I mean 100% of your deposit, the transmission has been done on your cost of fund or is there anything left?
Jagadesh. J
We are close to 65% in terms of repricing of deposits as above as on December. And maybe Q4 exit will be close to 85% levels. So that’s the outlook.
Deepak Poddar
85% Q4A.
Jagadesh. J
Yes.
Deepak Poddar
So that’s the reason you, you’re mentioning that there can be an upward bias on your nems.
Jagadesh. J
Yeah, slight. So it’s a one of the levers. Yes.
Deepak Poddar
Okay. Okay, understood. And, and, and given, I mean the, the, the market is doing well and, and even improvement in MFI. So anything on FY27, how should one look at your growth?
P. N. Vasudevan
Yeah, so as we mentioned, we should. End up with about a 15% growth for this year. And again I’m asking, I’m excluding the DA, right. If I add the DA part of it, it might be about 17, 18% growth. But for the minute I am taking the DA out because it’s just a one time one off transaction. So without that we should be ending up this year at about a 15% growth. Growth. But historically we have generally grown between 20 and 25% growth, you know, on a yearly basis. So going forward next year we should look at anything between 20 and 25
Deepak Poddar
20 and ROA.
You are talking about exit ROA of 1%. So how about FY27 ROA?
P. N. Vasudevan
So we should expect the next year fourth quarter exit ROI at 1.5%. Sir.
Deepak Poddar
Fourth quarter exit. Okay. Okay.
P. N. Vasudevan
Yeah.
Deepak Poddar
Okay, understood. Okay. Yeah. That would do it for my side. That’s very helpful, sir. I wish you all the best.
P. N. Vasudevan
Thank you.
operator
Thank you. The next question is from Ashish Agarwal, an individual investor. Please go ahead.
Ashish Agarwal
Hello. Yeah. Am I audible?
operator
Yes, sir. You’re audible.
Ashish Agarwal
Okay. So one was regarding this, our bank looking at the universal bank license. What is our outlook on that?
P. N. Vasudevan
Well, you know, we have mentioned this in the past also by March 26th we hope to be, you know, meeting all the requirements of the guidelines of RBI for that conversion. So based on that March 26 financials, once we know that we are in compliance with the guidelines that then subsequent to that we may probably end up applying.
Ashish Agarwal
Okay, thank you. The other thing is that our still the, our 90% plus of loan book is concentrated to the South India. So what is the plan? To geographically diversify and any timelines for that?
Jagadesh. J
So sorry, our TN as a geography of meaning 90%. So what is that?
Ashish Agarwal
So all the states in South India, right. You have mostly concentration in Tamil Nadu, Karnataka, ap, Telangana. So that. And we wanted to expand it across India. So any strategy and you know timelines around that.
Jagadesh. J
If you look at the past two years, we have reduced our contribution from TN.
Okay. Which was at around close to more than 50 percentage. It has now come down to 44 percentage. Even we have a clear strategy to reduce further. Maybe in the next three to four years it will come down to around 36%. And south we don’t have a 90 percentage book. If you see only Tamil Nadu we have 44. Okay. And south it’s 62 percentage. Okay. And Maharashtra is the third biggest state for us in terms of the contribution. So it’s not 90%. It’s around 60 percentage that will further come down.
Ashish Agarwal
Okay. And this MFI book that we have got, will it be covered by the Upcoming Central Government 8000 crore MFI Credit Guarantee Scheme that they’re talking about to be coming in April, I believe we.
P. N. Vasudevan
Are already covering our microfinance portfolio under the CGFMU credit guarantee scheme of the central government. And currently what percentage? Around 50% of our existing microfinance book is already covered under that guarantee. And this 50% is the one which is generated after we signed up with the guarantee trust. And going forward we will continue to be getting the incremental disbursements in micro finance guaranteed under that scheme. As far as this 8,000 crore scheme is concerned, of course the details are not in public just now. They have not released it. So we’ll have to await for the detail.
But in our view it is not meant for guaranteeing the individual transactions. It’s actually a guarantee cover provided to the banks for lending to NBFC MFIs. I think that’s. That’s what people talk about. Anyway we’ll have more details as the government publishes it. But that is not meant for individual MFA transaction guarantee that is already available under the cgfmu.
Ashish Agarwal
Okay. And in the commercial vehicle space. Do you see what is your foresight about increase in this segment because of the signs of tailwinds coming in the CV space?
Jagadesh. J
We don’t see any kind of tailwinds. Even if you look at the current quarter. We have shown a good amount of traction in our used segment which is our prime focus. So we’d Be growing on that. Even the asset quality is been better compared to the previous quarters.
Ashish Agarwal
Okay, that’s it from my side. Thanks.
Jagadesh. J
Thank you.
P. N. Vasudevan
Thank you.
Jagadesh. J
Thank you.
operator
Thank you. The next question is on the line of Sripal Doshi from Equi Risk Capital. Please go ahead.
Shreepal Doshi
Hi sir. Thank you for giving me the opportunity. My first question was on the MFI portfolio. So with the headwinds behind, we’ve seen disbursements ramping up. However we were looking at capping it at 8 to 9% whereas it is already reached 12%. So will we be little practical here and look at maybe it expanding to 15, 16% given the kind of momentum that we are seeing or the credit demand that we’re seeing in that segment?
P. N. Vasudevan
See the 12% is because of the addition of that direct assignment purchase of agri pool. So we’ll have to for all our purposes keep that on the side because obviously no, that comes at a lower rate and it’s supposed to be a one time it we just did it because we had a shortfall in the agripsl and hopefully we should be able to generate our own PSL going forward. So we may not do da further. So that’s just a one off transaction. So if you for a minute remove that. Our microfinance contribution is about 8 and a half percent, 8.8% of the total advances and we want to keep it around the 10% level.
So it may marginally go up in the next few quarters to reach the 10% level. As far as the thought of increasing it to 14, 15 or anything above that, we do not have a thought on those lines fundamentally because you know, we, you know microfinance does come with its own plus and minus and every time it comes with a minus it has a impact which is quite disproportionate to its contribution. And so we are basically wanting to build a bank which is lot more stable and steady in terms of its financial returns and not having too much of volatility around that? A 10% we believe is something where we get the benefit of better yield.
But at the same time if there should be any further trouble in the future, the impact should not be too high on the bank and the rest of the book, which is 90% of the book, which is a non micro finance. Actually most of our products, practically all our products are quite old in the system. They are not really new products. And so either they are fully profitable or they are on the way to being fully profitable in the next few quarters. So that way we don’t see any, you know, issue as far as profitability is concerned because almost all the products are now quite mature in the system.
Shreepal Doshi
Got it. And so since you highlighted about the profitability. So even the housing vertical is is profitable. It’s housing and used car vertical that we have which is contributing almost 10% of the overall portfolio. Summing up the two segments.
P. N. Vasudevan
Yeah, yeah, used car is quite profitable. And affordable housing, you know, which is actually one of the newer products. It’s about four years, five years old. But it went through the corona phase of non small growth. So it’s practically a three year old product. Now you can say post Corona and affordable housing was loss making last year. This year it has turned the corner and it is now contributing profit to the bank and maybe next year and thereafter it should become fully contributing from an ROI perspective.
Shreepal Doshi
Got it. So the second question was on the vehicle finance segment. So there our strategy is to scale up the used CV segment and used car and not do new commercial vehicle broadly. However, if you look at that segment was going through turbulence in terms of asset quality trends, how are you seeing that shaping up in the coming quarters with respect to asset quality trends as well as on the business momentum? From our end.
Jagadesh. J
If you see the vehicle finance both on all parameters the Q3 has been good and we expect the same in Q4. Even if you see the X bracket, it has improved from 97.5 to 98.5 and also the DPDS considerable reduction has been done and the same is with the GNP as well as the credit cost. So we don’t see any kind of stress as far as the vehicle finance has been concerned in Q4 also.
Shreepal Doshi
Got it. So will we look at increasing our disbursements in this category or like especially in the used CV and used cars?
Jagadesh. J
Yeah, that’s our main focus. We will be increasing our disbursements in. Used commercial and used car segments.
Shreepal Doshi
Just one last question to end here. What is your broad range of Yield in used CV and used car?
Jagadesh. J
Around 17 percentage.
Shreepal Doshi
So that is for used seal,
Jagadesh. J
UCV. 17 and used call is also in the same range.
Shreepal Doshi
Got it recorded. Thank you so much for answering my questions and good luck with the next quarter.
Jagadesh. J
Thank you.
operator
Thank you. The next question is from the line of Alicia from Kotak securities. Please go ahead.
Ashlesh Sonje
Hi team, good morning. Ashlesh here from Kotak. Firstly on your opex, how are you internally thinking about opex? What should be the drivers from here on? What are you internally budgeting for it?
P. N. Vasudevan
So opex, you know, is Something that we have discussed in the past. The, you know, most of our cost I think we have mentioned in the past also is all of a fixed nature. There is only some small amount of the cost which is a variable linked to the business. To that extent, yes. The cost is kind of, you know, it’s a given. And our cost to income will come down as the business grows and the bank grows. The cost to income will come down as we leverage the existing investment in cost by doing better business.
So as we have mentioned, you know, this quarter it was around 70%. But for that 29 crore impact of labor code, minus that it would have been 70. And we expect next year, maybe by third fourth quarter we should expect this to go down to around 65% level. That will principally happen just as the driver will principally be basically the growth in the, in the business of the bank. The growth should be the driver to bring down the cost.
Ashlesh Sonje
Understood. Secondly, on the cost of SA and cost of term deposits, just a clarification. I think you indicated that the incremental cost of SA is 5.1 and TD is 7.3, is that correct?
Jagadesh. J
Correct. As of now. As of now SA is 5.1. We will go through one more iteration in coming February. So it is a continuous exercise.
Ashlesh Sonje
Okay. But the disclosure on the presentation says cost of TD is 8.1%.
Jagadesh. J
That is on the full book, repriced book.
Ashlesh Sonje
So you expect that 8.1 to eventually decline closer to 7.3.
Jagadesh. J
Correct. As you renew the existing book. Normally renewals happen at 60% levels, 30, 40% move into alternate assets. So as it reprices, the same book will become at the 60% level at this pricing point.
Ashlesh Sonje
Understood. And lastly, this microfinance direct assignment which you have done, can you just walk us through what the, what were the evaluations which you have done at the time of the transaction, what is the quality of the book, what is the reasonable mix, etc.
P. N. Vasudevan
Okay, so we did it with about six counterparties. Fundamentally all the portfolio that we purchased will have to be MFIN guardrail compliant, which is all that three lender, 2 lakh rupee, all that norms plus they should not have any overdue at the time that we purchase that asset. So it should be an X bucket and it should have had a, you know, on two year loan it should have completed at least three months. On a three year loan it should have completed at least six months of term. So those were the criteria that we used for acquiring that asset.
The yield on that asset. I can give you an Idea on that. The Yield is approximately 10.75% on that asset. I think we purchased about 1350 crores or so. Around 1350 crore is what we purchased. The overall Yield is around 10.75% and none of the portfolio includes any exposure from Karnataka. We just ensured that we excluded Karnataka and also Gujarat because Gujarat traditionally has been always having issues. Karnataka recently, you know that it’s been going through issues. So these two states we excluded. So these are the parameters that we use for that.
Ashlesh Sonje
Understood. Just last clarification, this one. The collection responsibility does not lie with you on this book, right?
P. N. Vasudevan
No it doesn’t. We have a collection agreement with the originating company and they will continue to do the collection and pay it to us.
Ashlesh Sonje
Wonderful. Thank you sir.
P. N. Vasudevan
Thank you.
operator
Thank you. The next question is on the line of Vivek Ramakrishnan from DSP Mutual fund. Please go ahead.
Vivek Ramakrishnan
Sir. My question is partly answered. So in terms of turn deposits, we’ve off late, seen a scramble for deposits happening across the system. So. But your cost of deposits at 8.1% means even if the rates go up a little you’re still having cushions in terms of reducing deposit rates. So is my understanding correct? Number one and number two are all your deposits non callable when it comes to bulk deposits?
Jagadesh. J
Correct.
Vivek Ramakrishnan
Okay.
Jagadesh. J
Close to 92% of the bulk deposit is one year duration and non callable in terms of book. See if you see last two years we have been totally going to heavy on 444 days. Now we are repricing it that 444 days with triple eight days with a lower. As I said total book arbitrage is 90bps. So this will continue in that direction only. And anyway the projection is there is one more rate cut either it may not happen in Feb but April. So as and when the rate cut happens we will follow and catch the graph.
Vivek Ramakrishnan
Excellent sir. So the other question is on capital. I mean as of now we are comfortable on as far as regulations go with 16.6%. But if growth were to come and you were to maintain your credit ratings as well, you may have to raise fresh capital. So is there any thought on timelines for that or is there a minimum capital adequacy that you will go to and then have to definitely raise capital.
P. N. Vasudevan
See we have an internal guideline that as soon as we touch 20% we should start looking at how to beef up capital. Generally we do not want our capital adequacy to go below 18% against the regulatory requirement of 15%. We really do not want it to go below 18%. Right now it is 20.47% or so. As we mentioned in the presentation as well as in my opening comments. You know, there are various ways of conserving capital other than just raising fresh capital. So we are working on all of that. Like IBPC where you shed assets in favor of other banks.
And then we do the CGT msc, especially the vehicles. We have done that. We are, I think we have done 16, 50 crores or so of vehicles which we got guaranteed under the CGT msc. Under that scheme, I think what percentage of principal gets released from capital? Almost 80% of the principal of the transactions covered under CGT MSC gets released from capital requirement. So we did that. And going forward we will continue to keep getting the vehicle finance incremental portfolio also covered under CGT MSC based on whatever is eligible. So that will again release a good amount of capital going forward.
Our gold loan now has started to pick up now. I know in fourth and third in second quarter we had a gold loan book of 400 crores. It’s almost come to 600 crores in the third quarter. And that is something again we are pushing for growth by introducing it in more branches going forward. So that will come again with no capital requirement. Our affordable housing is growing and again that has a much lower risk weightage compared to every other business. So there are various, various drivers for capital conservation. And that’s something that we are focusing on.
And at the end of it, in our view, first half of next year, we will not require capital. We will be comfortable with whatever we are doing. And second half, we will review it, you know, based on our internal accruals and what is the level of capital adequacy we are sitting on. We will do a review probably in the second half. The objective from our side clearly is to postpone capital raise as long as possible. Given our current market price scenario, we would like to postpone it as far as possible and try and ensure that we do not compromise on growth, but manage capital through a variety of instruments available to the company, to the bank.
Vivek Ramakrishnan
Yes, I can see that. In fact, in the last quarter, despite the growth, Your Capital Adequacy CET1 ratio has just actually improved. So in terms of the CET1 ratio, you talked about total capital adequacy, CET1, do you have any kind of guidelines in terms of where you won’t go.
P. N. Vasudevan
Below the regulatory requirement? CET1 is 7.5%, you know, 50% or the 15%. So that’s a regulatory. But I think we’ll be Fairly comfortable on CET1. We will never go anywhere near that regulatory floor.
Vivek Ramakrishnan
Right. Sir, I was looking more at the rating rationals that said 15% was one of the rating rationals which said in terms of credit rating. So that was my angle.
P. N. Vasudevan
Yeah. Because our internal accrual also should start coming in, you know, you know, last year and the first two quarters of this year was very poor on internal accrual. That’s also expected to start generating, you know, P and L from this quarter. I mean third quarter itself. We have delivered some 90 crores going forward. That should also help. So overall I think we should be comfortable on CET1 also.
Vivek Ramakrishnan
Okay. All the best, sir.
P. N. Vasudevan
Thank you.
operator
Thank you. The next question is from the line of Jignasial from Ambit Capital. Please go ahead.
Jignesh Shial
Thank you and thanks for the opportunity. Sir, just a couple of questions first. As I understand it, correct, we, our deposit repricing will be gradual. So we expect this to fall down. How do we see yields moving up? Because obviously we are not want, we don’t want to do more of MFI loans which have been the, I mean high yield category. How do we see yields moving or the. I understand this time it is also because of the buyout portfolio. But anything on the yield side, if you can get us.
Jagadesh. J
Yeah. So if you look at the advances yield because of the portfolio recalibration, you can see the small reduction. But if you look at the disbursement yield, okay. Which is going to be a Significant factor in Q2, our disbursement yield is at 15.78, whereas in Q3 our disbursement yield is 16.22. Whereas what overall asset book. So overall asset book in Q2 is 15.78 whereas in Q3 is 16.22. Even after the recalibration, whatever we have done, so it’s Almost close to 43 bips increase in the disbursement yield.
Jignesh Shial
That is also because you had seen an MFI surge that disbursement had picked up for MFI which you want to cap it below 10%. So if incrementally, if the overall growth will be your disbursement growth will be in line with your MFI growth will be more or less in line with other businesses growing. Then do we see this kind of movement happening in Yield again for Q4 onwards?
Jagadesh. J
Yep. Not only on the MFI book, even if you look at VF, we had an increase of 22bps and SBL 5 bips and AHF which has been a growing book in it has been increased by 25bps. So fairly I able to say maybe we will be maintaining or it will. Be on the upward side. It will not go down.
Jignesh Shial
Okay, understood. Secondly, on the SBL side now if we see that sequentially the disbursement at more or less remain flat. Right? If I see it correct. Why. Why there is a 1% kind of a decline. How and obviously we have seen this trend happening for almost like similar number for almost like last five quarters. I see it in your ppd. So how do we see. So can you give some color on what is this SBL loan? Which, which geographies are you doing it further, it is unsecured piece, right. It’s not secured one. It’s not lab.
Right. So how are we seeing traction happening in sbl? Can you give some color on that? That will be helpful. And obviously coverage remains very low on this. So any volatility this can impact our provisions and all Some clarity on SBL overall as a portfolio.
Jagadesh. J
Yeah. First I like to give a clarification on the overall book. We have only that micro finance is an unsecured otherwise all other books is a secured book Small business loan. It’s an under percentage secured by the property. Okay.
Jignesh Shial
Okay.
Jagadesh. J
If you look at small business loans quarter on quarter. If you see in the current financial year our disbursement at Q1 is at on an average per month is 4. Whereas in Q2 is 575. Whereas in Q3 our average disbursement is 612 crores. Why we couldn’t able to see the year on year growth which the underlying reasons is because of our Karnataka and Setane product segment where we have recalibrated in SBL in the between the Q3 and Q4 of the last financial year. Now it’s almost coming back to normalcy. We can see the upsurge in the disbursement in SBL as well.
And the number that I mentioned if you look at it will be on the upward trend.
Jignesh Shial
Okay. So do we can we expect this, that Q4 this 600 crores quarterly. What kind of trend? So not only Q4 overall for next year say so what. What monthly trend or annual. I I mean that we talk about the disbursement for SBL that we will be comfortable in.
Jagadesh. J
So the numbers that I mentioned first of all is the monthly average. Okay. For the next year we are looking at advances growth of at least here 20 plus in SBL so automatically the disbursement number will be on an upward movement compared to the current numbers.
Jignesh Shial
Understood. And this will be. So as I understand now, this is a LAP loan. So your. What will be the tenure of this loan overall? Around
Jagadesh. J
average, it would be around seven to eight years.
Jignesh Shial
Understood. Understood. Fine. That’s. That’s helpful. And finally on OPEC side, as you said that either of these expenses are remaining fixed and needs a very limited amount in variable one. So how do we. So you’re gradually planning to bring it down from say 70, which is excluding that one off of labor. Good thing. So 65 is the target that you are. Your, your target. I mean for overall what over what period are you targeting the 65% kind of cost to income?
Jagadesh. J
Yeah, yeah. So 4Q exit next year we should be there around 65% mark.
Jignesh Shial
Okay. Okay. So this is for the year itself. We are targeting this. Right. For the next year itself.
Jagadesh. J
Next year. Yeah. And also
Jignesh Shial
And finally here.
Jagadesh. J
Yeah. As also MD clearly said, no, when the fix actually the income goes up. No, the percentage will come down. That’s the.
Jignesh Shial
Yeah, I understood. Yeah, that’s what I was asking you. I got that point. And finally on credit cost, what. What kind of trajectory are we looking for? I mean for next year? Because as I understand our major ROI improvement or 1.5 exit, what we are talking about, 4Q obviously credit cost decline will be one of the major driver. So what kind of credit cost trajectory are we looking for? Say FY27, this broad range, if you. Can give some color that,
Jagadesh. J
between 1.5 to 1.7.
Jignesh Shial
And currently we are at what, 1.8, right?
Jagadesh. J
1.88 for the quarter. Okay. In Q4 it will be around less than 1.5. But what I mentioned is for the. Year, entire year
Jignesh Shial
entire year should be somewhere in the range of 1.5 to 1.7.
Jagadesh. J
Yes,
Jignesh Shial
perfect. That’s. That’s quite helpful. So thank you. Thank you so much and all the best.
Jagadesh. J
Thank you.
operator
Thank you. The next question is from the line of Anand Dhamma from MK Global. Please go ahead.
Anand Dama
Yes, sir. Thank you for the opportunity. My question was related to our CV books. A lot of players are actually talking about that. There is a noise, there is a stress which is emerging into the CV portfolio. Are we seeing any signs of that in our new or maybe used CV portfolio?
Jagadesh. J
Clearly indicated. Even in my earlier response, we have seen improved asset quality compared to Q2 to Q3 in all aspects. Not only on the net sleep pages or the credit cost, but also on the 1 to 90 DPD as well as on the X bracket. So we hope the things would be better in Q4 also.
Anand Dama
So then the players who are actually witnessing that kind of a stress operating to a different segment or a different geography altogether.
P. N. Vasudevan
See in our case, as Jaggi mentioned, a large part of our book is the used commercial vehicle. I think the used commercial is, are doing quite well. And in our case used commercial vehicle also we are really the focus is only on the small operators. And so I think at that level the small commercial vehicle, light commercial vehicle, no individual owner or owner with just one or two vehicles. I think that segment is doing quite well and we are not seeing any stress on that segment. If you want to compare with the market and other players, their portfolio might have lot of, you know, a different profile of borrowers.
NIO could be a good contribution to them possibly. And maybe the heavy commercial could be again a large contribution to them possibly. I mean those might be the differences that you might probably see. But in our case the focus is largely on the small and light commercial vehicles and in the used category. And in that segment, you know, we, we see the experience is pretty good not only now, I mean we have been doing used commercial vehicle now for almost 15 years and we’ve never really had a serious issue on the portfolio quality in the used commercial vehicle segment.
Anand Dama
So secondly, no, I just wanted to understand how should we look at our overall credit growth and deposit growth for FY27 now that the micro finance has also started turning positive. And I think the hpl, the vehicle financing book is delivering strong growth. So should we get into a 20% kind of a zone of growth next year?
P. N. Vasudevan
So next year as we mentioned, our growth should be in the range of 20 to 25. So it should be definitely above 20, that’s for sure. And the deposit growth will be in line with that. You know, typically it should be about 2 to 3, 3% higher than the advances growth.
Anand Dama
Okay. And third, sir, any ECL impact that you have worked on and because I think your PCR is still below 70%, you used to have 70%, then you brought it down to about 66, 67%. So any ECL working that you have already done, how you want to take that impact, if you can just talk about that.
Jagadesh. J
So we have done ECL working based on the draft, this one of RBI. And most of our secured book and. Other thing, we’ll have a positive, this one on the ecl, not on the negative as compared to the Iraq norms.
Anand Dama
Thank you. Thank you sir.
Jagadesh. J
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 and Vasudevan sir for his closing comments.
P. N. Vasudevan
Yeah. Thank you. Thanks all of you for dialing in and giving us a good insight of what’s happening in the market and also asking us questions which will help us to think as we go forward. As we sign off, I can only reiterate that I think the issues of microfinance is clearly behind not just us, but the industry. And going forward, let’s hope for better times for all of us. Thank you and wish you all the best. Bye.
operator
Thank you. On behalf of Equida Small Finance Bank Ltd. We conclude today’s conference. Thank you for joining us. You may now disconnect your lines.