Synopsis: Equitas Small Finance Bank’s ability to turn stability into profits hinges on lower MFI exposure at 9%, improved asset quality with GNPA at 2.82%, sharply reduced credit costs of 2.16%, and whether efficiency gains can lift still-weak ROA of 0.18%.
Equitas Small Finance Bank is part of India’s growing small finance banking sector, catering mainly to individuals and small businesses that often lack access to traditional banking. In a market where lending risks and operational costs can directly impact profits, the bank’s ability to manage risk and run efficiently becomes crucial. Exploring how lower credit risk and better operational efficiency could influence its earnings provides insight into the bank’s potential for sustainable growth.
Equitas Small Finance Bank Limited, with a market capitalization of Rs. 8,009.25 crore, closed at Rs. 70.20 per equity share, up by 0.83 percent from its previous day’s close price of Rs. 69.62 per equity share.
Equitas Small Finance Bank Limited has delivered returns across multiple timeframes, with a 1-month return of 15.46 percent, a 3-month return of 17 percent, and a 6-month return of 17.81 percent The stock has delivered a 6.7 percent return in the past 1 year and in the longer frame of 5 years it has delivered a return of 75.49 percent.
Equitas Small Finance Bank Limited, based in Chennai and incorporated in 1993, offers a wide range of banking products and services to individuals, corporates, and micro, small, and medium enterprises in India. Its operations include Treasury, Corporate/Wholesale Banking, Retail Banking, and other services.
The bank provides savings, current, fixed, and term deposit accounts; various loans such as small business, vehicle, microfinance, housing, MSE, gold, and personal loans; credit cards; and lockers. It also offers insurance (life, general, and health), mutual funds, forex services, FASTag, and three-in-one accounts (bank, demat, trading). Services are available to children, senior citizens, NRIs, and farmers through branches, offices, and ATMs.
Background: From Stress Management to Stability
Equitas Small Finance Bank entered FY26 after a prolonged phase of balance-sheet stress, largely driven by volatility in its microfinance (MFI) portfolio. By Q2FY26, the bank has clearly shifted its focus from managing risk to stabilising operations. This transition is visible in its asset mix, asset quality indicators, funding profile, and capital position, all of which point to a bank that has reduced downside risk but is still working toward sustainable profitability.
Lower Risk Through Asset Mix Rebalancing
One of the most important structural changes has been the reduction in MFI exposure. As of Q2FY26, MFI forms 9 percent of gross advances, down sharply from earlier periods, while secured lending dominates the portfolio.
Small Business Loans (SBL) account for 44 percent, Vehicle Finance 25 percent, Housing Finance 13 percent, MSE Finance 5 percent, and NBFC funding 2 percent of advances. This rebalancing has lowered portfolio volatility and improved predictability of cash flows, even though it has moderated headline yields.
Asset Quality
Asset quality indicators suggest that the worst phase of stress is behind the bank. GNPA stood at 2.82 percent and NNPA at 0.95 percent in Q2FY26. Net slippages improved on a QoQ basis, and the bank also sold ~Rs. 216 crore of NPAs to an ARC, helping clean up the balance sheet. The Provision Coverage Ratio remained robust at 66.93 percent, supported by provisioning levels that are higher than regulatory norms, reflecting a conservative risk stance.
Credit Cost Normalisation
Credit cost has been a major drag on profitability in recent quarters, but this has started to normalise. In Q2FY26, credit cost declined to 2.16 percent, a sharp improvement from 6.48 percent in Q1FY26 and 3.72 percent in Q2FY25. This reduction was driven by better collection efficiency, particularly in the MFI book, and proactive write-offs and ARC sales. Lower credit cost has directly supported the return to positive profitability in the quarter.
Cost Structure
While risk has reduced, operational efficiency remains a work in progress. The cost-to-income ratio increased to 75.89 percent in Q2FY26, reflecting elevated employee expenses and operating costs as the bank continued to invest in branch expansion, manpower, and digital platforms.
Total operating expenses stood at Rs. 757 crore, up 11 percent YoY, while employee strength increased to 27,145. The key challenge now is to extract operating leverage from this cost base as advances grow.
Margins and Funding Profile
Net Interest Margin declined to 6.29 percent in Q2FY26, down from 7.69 percent in Q2FY25, mainly due to the lower MFI mix. However, the liability side has begun to improve. The cost of funds fell to 7.35 percent, supported by a reduction in savings account cost to 5.57 percent and term deposit cost to 8.32 percent. The CASA ratio remained stable at 31 percent, and retail deposits formed 75 percent of total deposits, indicating improving funding stability.
However, overall profitability remains subdued, with ROA at 0.18 percent and ROE at 1.65 percent. These numbers highlight that while losses have been arrested, the bank is still far from delivering returns comparable to mature peers.
Capital Strength and Growth Visibility
Equitas remains well capitalised, with a CRAR of 20.74 percent, including Tier-I capital of 16.44 percent, providing adequate headroom for growth. Gross advances grew 9 percent YoY to Rs. 39,123 crore, while deposits increased 11 percent YoY to Rs. 44,094 crore. Management expects ~15 percent advance growth in FY26 and a steady-state growth trajectory of ~20 percent beyond FY26, led primarily by secured lending products.
Equitas Small Finance Bank has successfully reduced risk through asset mix changes, conservative provisioning, and balance-sheet clean-up. Lower credit costs and a declining cost of funds have created the foundation for profit recovery. However, sustainable profitability will now depend on improving efficiency, moderating the cost-to-income ratio, and achieving operating leverage as growth accelerates. The bank has moved past the crisis phase; the next phase will test its ability to convert lower risk and better efficiency into durable profits.
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