AU Small Finance Bank, India’s only large-cap small finance bank (SFB) has industry beating fundamentals. But another SFB – Equitas Small Finance Bank – is catching up.
Most SFBs, which akin to Equitas operated as microfinance lenders previously, still have large exposure to high-risk microfinance loans. But Equitas has stood out.
It has sharply reduced its unsecured assets (microfinance loans) in the last many years. From 53% exposure to such loans in FY15, this has been dropped to 19% as of Q3 FY24.
The focus on diversifying its loan portfolio has yielded results. Equitas is now among tier-1 SFBs like AU SFB and Capital SFB with higher-secured assets and stable health.
In fact, Equitas and AU SFB were the only industry players that maintained healthy return on asset and gross NPA ratios during the COVID-19 led downturn in FY21-22.
Equitas’ loan growth, asset quality, growth and profitability are now almost on par with that of AU SFB, but there still remains a significant gap in valuations.
Access to low-cost funds (in the form of CASA) has helped its advances and deposits jump 28% and 35%, respectively, annually between FY18-FY23.
Some risks to note for Equitas: - Heat from large commercial banks with much lower costs of funds than SFBs. - High business concentration (50% loan portfolio) to Tamil Nadu