Equitas Small Finance Bank Ltd: A Hidden Gem?

“Our fee income has been robust. We had a very strong growth in our liabilities and our asset quality has been consistently improving. Our advances excluding the restructured loans are behaving normally and almost all the parameters of performance, the non- restructured book which is approximately around 95% of the total book has come back to the pre-COVID levels practically in all parameters in terms of performance matrix. The annualized gross slippage for the non- restructured book in the first quarter was 2.7% which is back to almost the old levels and that book also exhibits a very strong expected collection which means that build up of stress into the future quarters is also very comfortable.”

– P.N. Vasudevan, Managing Director & CEO

Company Description:

Equitas Small Finance Bank Ltd. focuses primarily on Priority Sector Lending (PSL). It has proved itself to be one of the largest small finance banks in India. As a small finance bank, the target demographic of the lender are individuals with limited access to formal credit. The majority of advances for the lender are in Small Business & Agri Loans, Vehicle Finance, Micro Finance, Housing Finance and NBFCs. The bank’s objectives are to provide access to credit to these under – served sectors of our growing economy.

Let’s elaborate on the features of this lender that makes it stand out among other in this sector:

Cost of Funds:

One of the most significant advantages that a small finance bank has over an NBFC is the ability to allow deposits in the Current Accounts and Savings Accounts (CASA). The reason being that firms which rely on other sources of funds other than CASA deposits have to pay a higher interest rate. So, the reliance on CASA Deposits results in a higher net interest margin (NIM) for the firm. Aligning with this, Equitas Small Finance Bank Ltd. has actively pursued the strategy of increasing the proportion of CASA deposits as a crucial source for their funds. 

As the ratio of CASA Deposits to total borrowings increased from 31.6% in Q1FY22 to 44.6% in Q1FY23, the cost of funds decreased to 6.20% from 6.93% a year ago. 

In return, the lowered cost of funds have led to an increase in the bank’s Net Interest margin which has grown from 7.87% in Q1FY22 to 9.05% in Q1FY23.

Loan Book Composition:

“We are only 18% microfinance which represents the unsecured portion. The rest is secured and in secured I think Rohit had spoke about vehicle finance, loss on repo is 40% which is the highest among the other products so all in all we are far more stable than what we were years back when demonetization happened and we are also fairly stable compared to other SFB’s who are in the evolving space.”

– Dheeraj Mohan, SVP Head Strategy, IR, BI and Customer Experience

When we consider Equitas Small Finance Bank’s Loan Book Composition, it is evident that the portion of the loans that are unsecured are limited to the 18% as per the Q1FY23 Earnings Call in the MicroFinance segment and the company has given guidance that this portion of the loan book will be limited to 10% – 15% in the future. The remaining 82% of the entire loan book of the firm are in secured segments. Relative to most of the other competitors in this space, this presents itself as a huge differentiator. The shift of the loan book composition to the secured space is a testament to the measures taken by the firm to improve asset quality.

Asset Quality:

The targeted customer base of the bank are largely from the poorer sections of the society who have limited access to formal credit. Thus, when an economic downturn occurs especially in cases like the pandemic, the Bank’s customer base felt the burden of it severely.

Equitas Small Finance Bank has been slowly recovering from the downturn brought about by the pandemic. The Gross NPA were at 4.58% levels in Q1FY22 and have been brought down to 3.95% in Q1FY23 and similarly NNPA have decreased as well.

Financial Performance: