Detailed Rationale

CRISIL Ratings has reaffirmed its short-term rating on Certificate of deposit of Equitas Small Finance Bank Ltd (Equitas SFB) at ‘CRISIL A1+’

 

The rating continues to be driven by the diversified product portfolio of the bank with increasing focus on secured lending, adequacy of its capital position in relation to scale, sustained growth in the deposit franchise and an experienced management team, with strong focus on process orientation. These strengths are partially offset by the modest credit risk profile of borrowers, average yet improving profitability, and moderate geographical concentration in business.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has assessed the standalone credit risk profile of Equitas SFB.

Key Rating Drivers & Detailed Description

Strengths:

• Diversified product profile with increasing focus on secured lending: Equitas SFB is the second largest small finance bank in the country in terms of loan portfolio which comprises small business loans (SBL, 38%), vehicle loans (24%), microfinance loans (18%), housing finance loans (12%) and medium and small enterprises (MSE, 3%). Other retail segments such as gold loans, though growing, form a small portion of the overall book.  In terms of wholesale book, the bank has an NBFC lending portfolio however, disbursements within this have been consciously curtailed over the last 2-3 quarters. In the near to medium term, the bank intends to foray into personal loan segment (including credit cards), however the share of such unsecured retail loans including the existing microfinance portfolio, is expected to remain within 15% of gross advances on a steady state basis. The asset base of the bank has remained focused on retail portfolio and this diversity has helped the bank in curtailing the influence of disturbance in any one segment, on the overall asset quality of the bank.

 

Overall gross advances (including off book) grew 23% over fiscal 2024 to Rs 34,337 crore, driven by 30% growth in SBL which accounts for the largest share in the bank’s overall AUM. Vehicle finance, the second largest portfolio, grew at 19% over the same period. Microfinance business, which remained volatile since the outbreak of Covid-19, registered a growth of 20%. Share of loans to NBFCs and other smaller segments like gold and unsecured loans, remains relatively small.

 

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: Capital position remains adequate for the scale and nature of operations of the bank, as indicated by reported networth of Rs 5969 crore as on March 31, 2024. Since its transformation into a bank in September 2016, Equitas SFB has maintained a capital adequacy ratio (CAR) over 21%. As on March 31, 2024, the tier I and overall CAR stood at 20.7% and 21.7%, respectively.  

 

• Sustained traction in deposit franchise: The deposit base has grown at 43% to reach Rs 36,129 crore in fiscal 2024 from Rs 25,348 crore is fiscal 2023, which accounts for 92% of its total external liabilities (excluding direct assignment). This growth was driven by traction in the bank’s retail term deposits which grew to 39% of the total deposits as on March 31, 2024, from 35% as on March 31, 2023. The aggregate share of retail deposits and current and saving account (CASA), in total deposits (including certificate of deposits), was 71% as on March 31, 2024, which is comparable with most universal banks. However, CASA ratio has sequentially fallen to 32% as on March 31, 2024 from 42%, a year ago in line with the trend witnessed for the banking sector. This was partly a factor of better interest rates being offered on term deposits leading to higher growth in retail term deposits and wholesale term deposits.

 

Sustained traction in retail deposits continues to stem from initiatives implemented by the bank in fiscal 2020-2021. Equitas SFB had launched the 3-in-1 deposit account, a deposit product exclusively for women and a customised product for non-resident Indians (NRIs), all of which have propelled customer acquisition. Another stimulus to CASA has been the rate which Equitas SFB has been offering for savings accounts and retail term deposits through its program “Elite” which caters to the mass affluent customer segment. The deposit contribution from this programme has crossed Rs 14,921 crore in fiscal 2024. For fiscal 2024, the bank’s blended cost of deposits was 7.0% as compared to 6.1% for the previous fiscal.

 

Going forward, bank plans to have a four -pillar strategy for its liabilities- family banking for mass affluent, Non resident (NR) Indian banking for NRI segment (authorised dealer category 1), transaction banking for enterprise and entrepreneurs and digital banking for digitally savvy and branchless customers.

 

• 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 remains susceptible to modest credit profile of most customers and high 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 petty jobs which may be associated with irregular cash flows..

 

In the aftermath of the pandemic, the bank’s pro-forma gross non-performing assets (GNPAs) surged and peaked at 4.6% on September 30, 2021, vis-à-vis sub 3% reported in pre-Covid period. As on March 31, 2024, the bank reported GNPA of 2.5% (2.4% including securitization assets) and net NPAs was 1.1%. The bank's provisioning coverage ratio (PCR) stood at 56% as on March 31, 2024, as compared to 57%, a year ago. However, the bank intends to maintain it at mildly higher levels on a steady state basis.

 

As on March 31, 2024, the bank had a restructured portfolio of Rs 50 crore (reduced from Rs 235 crore a year ago), most of which was restructured under the second scheme. This formed 0.1% of gross advances as on that date. Total stressed assets (inclusive of GNPA, restructured portfolio and write offs over fiscal 2024) constituted approximately 3.2% of gross advances (4.3% of the gross advances as on March 31, 2023).

 

In terms of geographical diversity, 49% of Equitas SFB’s portfolio is housed in Tamil Nadu which makes the book susceptible to local socio-political issues and natural calamities and this, in CRISIL Ratings’ opinion, remains a challenge for the bank.

 

• Average ; though gradually improving profitability: For fiscal 2024, the bank reported net profit of Rs 799 crore, translating in return on managed assets (RoMA) of 1.9% as compared to net profit of Rs 574 crore and RoMA of 1.8% in fiscal 2023.

 

Despite contraction in net interest margin (NIMs) to 7.3% in fiscal 2024 from 7.9% a year ago, the profitability has improved as the impact of contraction in NIMs was offset by reduction in credit cost and operating expenses. Credit cost to average managed assets reduced to 0.7% in fiscal 2024 from 1.3% in fiscal 2023 and operating expenses to average managed assets reduced to 5.9% from 6.3% in the same period. Additionally, the bank booked Rs 104 crore as treasury income (as compared to Rs 21 crore during fiscal 2023) which has further contributed to the overall profit.

 

As the bank scales up its secured portfolio, yields may decline marginally with some of its impact being offset by a corresponding decline in cost of funds. This may result in compression of interest margins. Further, the bank also endeavours to increase its steady state PCR to 70% level. In such a scenario, the bank’s ability to diversify streams of income and optimize operating expenses to sustain adequate profitability, remains a key monitorable.

Liquidity: Strong

The bank had an excess statutory liquidity ratio (SLR) of Rs 3404 crore and a Liquidity Coverage Ratio (LCR) of 176% on March 31, 2024. The bank’s liquidity profile is also supported by its on-tap access to avail refinance limits from financial institutions. Incrementally, Equitas SFB’s liquidity position will remain supported by its scheduled commercial bank status which allows it access to the systemic liquidity of RBI.

 

ESG profile

CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of Equitas SFB supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on the environment.

 

Equitas SFB has an ongoing focus on strengthening the various aspects of its ESG profile.

 

Key ESG highlights of Equitas SFB:

• Equitas SFB’s scope 1 and 2 emissions and energy consumption intensities are lower compared to peers.
• Gender diversity is an area of improvement for the lender, with only ~12% female employees as of fiscal 2023.
• Equitas SFB, through its micro finance loan program, supported ~35,000 people with disabilities, thus contributing to the society.
• Its governance structure is characterized by ~91% of its board comprising of independent directors, ~9% woman directors, presence of independent chairperson on the board, dedicated investor complaint redressal system, and extensive financial disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of Equitas SFB to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic and foreign capital markets.

Rating Sensitivity factors

Downward factors:

• Moderation in asset quality in the scheme of growth, leading to potential weakening in profitability and capital position.
• Inability to garner retail deposits leading to its share in the total deposit base falling to and remaining below 30% for a prolonged time.

About the Bank

Equitas SFB is the second largest small finance bank. It commenced operations in 2007 as a microfinance entity and eventually diversified its advances book in to housing and vehicle finance in the year 2011. Upon receiving the SFB license from RBI in 2015, Equitas SFB started its banking operations in September 2016. Since then, the bank has built a well-diversified asset portfolio and a granular retail deposit base. The Bank operates in 18 states and Union Territories with more than 900 physical banking touch points

Key Financial Indicators (standalone)

As on / for the period ended March 31	Unit	2024	2023	2022
Total reported assets	Rs crore	45,304	34,958	26,948
Total income	Rs crore	6285	4831	3997
Profit after tax	Rs crore	799	574	281
Gross NPA	%	2.5^	2.6	4.1
Tier I CAR	%	20.7	23.1	24.5
Overall capital adequacy ratio	%	21.7	23.8	25.2
Return on managed assets	%	1.9	1.8	1.1

^2.4% including securitised book

Any other information: Not Applicable