This small finance bank might be the next AU SFB

From starting out as a microfinance lender in 2007 to now being the second-largest small finance bank (SFB) by market cap, Equitas Small Finance Bank 's journey hasn't been a one-way street. Before the company obtained a licence in FY17 to operate as an SFB in India's highly regulated banking sector, it faced many hiccups, including the microfinance crisis of 2010. The crisis engulfed the industry as a result of over-indebtedness, poor loan recovery practices and subsequent suicides of borrowers in Andhra Pradesh. The upheaval forced Equitas SFB to diversify its loan book. It gradually ventured into small business loans and vehicle and housing finance. Later, its transition from an NBFC to an SFB proved to be a shot in the arm, allowing the company to offer customers a wide range of products, an advantage not available to traditional microfinance institutions. Cut to the present day, in terms of business fundamentals, the company is now close to joining ranks with the only large-cap SFB in India— AU SFB — thanks to its sharp downsizing of unsecured assets (microfinance loans). Let's dig deeper and find out what has changed for Equitas since becoming a small finance bank. Rising pie of safer loans Nearly all existing SFBs in India, which previously operated as microfinance institutions, continue to have significant exposure to microfinance loans that, albeit, earn higher yields (i.e., net interest margin) but carry equally higher risks. (high bad loans during economic downturns). Lending on thin ice SFBs and their exposure to microfinance and unsecured loans SFBs Microfinance exposure (%)