Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Diversified product profile with increased focus on secured lending: Equitas SFB is the second largest small finance bank in the country and has a presence in product segments such as Small Business Loans (43%), vehicle loans (25%), and micro-finance loans (12%). Other segments like MSE Finance accounted for 4% of AUM whereas loans to NBFCs (corporate loans) were 1% of AUM as on March 31, 2025.

The AUM grew by 11% over fiscal 2025 to Rs 37986 crore, as compared to a growth of 23% in fiscal 2024. The slowdown in fiscal 2025 was due to deliberate reduction of exposure to Microfinance owing to asset quality challenges. Resultantly, the microfinance portfolio declined by 28% during fiscal 2025 whereas other key segments like Small Business Loans/LAP (YoY growth of 23%), Affordable Housing Loans (22%), and Vehicle Loans (23%), drove the overall growth. Share of loans to NBFCs and other smaller segments like gold and unsecured loans, remains relatively small.

The bank has maintained a diverse portfolio, reaping the benefits of its legacy book across retail asset segments. Particularly last year, the bank introduced personal loans and credit cards for its existing customers to deepen the relationship however, its share remains small with no aggressive plans of growth. More so, over the years - the bank has reduced exposure to volatile segments like microfinance, which has resulted in 88% of the overall AUM being secured as of March 31, 2025. This transition in asset mix has helped the bank in curtailing the influence of disturbance in any one segment, on the overall asset quality of the bank.

The bank has been focusing on de-risking its balance sheet by shifting its focus to the secured portfolio, which is also contributing to overall growth of advances.

Adequate capitalization: The bank's capital position remains adequate for its scale and nature of operations, as indicated by reported net worth of Rs 6,073 crore on March 31, 2025 (Rs 5969 crore as on March 31, 2024). This has been primarily supported by internal accretions of the bank. Since its transformation into a bank in September 2016, Equitas SFB has maintained overall CAR over 20%. On March 31, 2025 – tier I and overall capital adequacy were comfortable at 17.8% and 20.6%, respectively. Gearing remained moderate at 7.5 times on March 31, 2025.

Sustained deposit franchise: Over fiscal 2025, the bank’s deposit base grew by 19% to reach Rs 43,107 crore which accounts for 95% of its total external liabilities as on that date. With growth, there has been emphasis on granularity. Thus, the bank’s retail term deposits have increased from 37.4% on March 31, 2022, to 43% as on March 31, 2025.

The aggregate share of retail deposits and current and saving account (CASA), in total deposits (including certificate of deposits), was 72% as on March 31, 2025 (against 74% on March 31, 2024), which is comparable with peers. However, CASA ratio has sequentially fallen to 29% as on March 31, 2025, from 32%, a year ago in line with the trend witnessed for the banking sector. Cost of funds were 7.3% for fiscal 2024 and have increased to 7.5% for fiscal 2025 – alongside by the rate cycle trend.

Experience of senior management, strong process orientation and conservative risk policies: As Equitas SFB transformed into a bank, its senior management team was strengthened to enhance smooth ramp-up of banking operations. Eminent professionals from different fields of the financial sector have been brought on board.

The bank has had a stable senior and middle management team with most members having been associated with the bank for many years.

Equitas has been a highly process driven entity with robust systems and processes and strong technical backing ever since the commencement of microfinance operations. This attribute has helped scale up the business and enabled the bank to replicate similar models with modifications for vehicle and other portfolios.

Weaknesses:

Asset quality, though range bound, remains susceptible to risks inherent to unsecured segment and geographical concentration: Despite segmental diversification in portfolio and increased focus on secured lending, the bank’s customer base has not changed materially. The borrower base still comprises people living in rural and semi-urban areas, carrying out small business operations or doing jobs which may be associated with irregular cash flows. This vulnerability was evidenced during the pandemic as well – wherein the repayment capability of the borrowers was hindered – resulting in peak gross non-performing assets (GNPAs) of 4.6% on September 30, 2021, which eventually corrected as the ground level situation restored.

Over the past fiscal, asset quality in the microfinance portfolio moderated due to challenges like over-indebtedness, attrition and regional stress – causing the overall 90+ dpd to rise to 2.9% as of March 31, 2025, from 2.5% (excluding write offs of Rs 826 crore) a year later. The delinquencies in the microfinance portfolio (90+ days past due [dpd]) increased from 4.0% on March 31, 2024 to 5.2%, a year later. Over the same period, 90+ dpd in the MSE segment also inched up from 3.8% to 4.9%. Some rub off was seen in other segments also – in LAP – 90+ dpd increased from 1.8% to 2.4%. In other segments like corporate, vehicle and others, the asset quality metrics remained stable.

At an overall level, GNPA and NNPA were 2.9% and 1% on March 31, 2025 – rangebound as compared to 2.6% and 1.1%, a year prior. This movement in GNPA was primarily a factor of Rs 2032 crore of slippages (Rs 1139 crore for fiscal 2024) which were set off by Rs 826 crore of write offs (including technical write offs) and Rs 959 crore of recoveries and upgradations. All these metrics were higher than last fiscal due to challenges that surfaced during the year like elevation in average indebtedness, heightened attrition and most recently, disturbance in Karnataka post issuance of the Ordinance. There was no sale of NPA assets to ARC this fiscal.

The bank's PCR increased to 67% as on March 31, 2025, as compared to 56%, a year ago – driven by its objective of maintaining lower GNPAs. As on March 31, 2025, the bank had a standard restructured assets of Rs 8 crore as compared to Rs 50 crore a year ago. This formed 0.02% and 0.1% of the AUM as on that date, respectively.

In terms of geographical diversity, 46% of Equitas SFB’s portfolio is housed in Tamil Nadu (49% as on March 31, 2024) which makes the book susceptible to local socio-political issues and this, in Crisil Ratings’ opinion, remains a challenge for the bank.

Profitability remains moderate: For fiscal 2025, the bank reported net profit of Rs 147 crore, translating in return on managed assets (RoMA) of 0.3% as compared to net profit of Rs 799 crore and RoMA of 1.9% in fiscal 2024.

Equitas SFB’s earnings profile was impacted during the year, on account of stress stemming from the microfinance, MSE and small ticket secured segments. As the bank decided to make an additional provisioning of Rs 375 crore (including a floating provision of Rs 180 crore and a sector stress provision of Rs 100 crore) and also write off Rs 826 crore(including technical write offs), credit costs rose to 2.2% for the year from 0.7% for the previous year. Resultantly, RoMA compressed to 0.3% for fiscal 2025 from 1.9% for fiscal 2024 (1.8% for fiscal 2023). Further, due to low AUM growth and higher slippages – net interest margins (NIMs-on total income) contracted to 6.4% from 7.3% over the respective periods.

Operating expenses to total managed assets reduced to 5.5% as on March 31, 2025, from 5.9% as on March 31, 2024, providing a partial offset. Absolute PAT for fiscal 2025 was Rs 147 crore as against Rs 799 crore for fiscal 2024.

As the bank scales its secured portfolio with no major change in asset mix foreseen, yields may remain at similar levels. More so, over 85% of the asset book has fixed rates thus the downward rate cycle will not have a material impact on the yields in the fiscal. The cost of funds may decline marginally but would remain range bound. This may result in interest margins remaining intact. In the medium term, given the asset quality across some key segments is yet to normalize – ability to control credit costs and restore RoA and diversify streams of income with optimization of operating expenses (which are still relatively high), remains a key monitorable.