Growth Strategy
Equitas Small Finance Bank (ESFB) has been strategically focusing on diversifying its loan portfolio by reducing its dependence on microfinance and increasing its secured lending. The bank aims to:
- Diversify Lending Portfolio: Transition from a microfinance-heavy model to a secured loan-driven approach, targeting small business loans (SBL), micro LAP (MLAP), affordable housing, and vehicle financing. Currently, 86% of the bank’s portfolio consists of secured loans.
- Enhance Liability Franchise (Liabilities 2.0): Improve deposit mobilization and reduce funding costs by increasing retail deposits, offering competitive term deposit rates, and launching new financial products like credit cards and personal loans for depositors.
- Expand Digital Capabilities: Invest in technology-driven services such as a revamped mobile banking platform, AI-powered credit assessments, and automated loan origination to enhance customer experience and operational efficiency.
- Grow Retail Deposit Base: The bank has focused on increasing its CASA (current and savings accounts) and retail term deposits, currently standing at 73% of overall deposits.
Future Outlook
Equitas Small Finance Bank is positioning itself for sustainable growth with the following initiatives:
- Increase in Secured Loan Portfolio: The bank expects its microfinance share to decline to single digits, with more emphasis on MLAP, used commercial vehicle loans, and affordable housing.
- Cost of Funds Optimization: Through operational efficiency, product cross-selling, and digital transformation, the bank aims to lower its cost of funds to narrow the gap between itself and universal banks.
- Profitability Improvement: With affordable housing loans expected to turn profitable in the next financial year, overall margins should improve. The focus on high-yielding segments like MLAP and SBL will further boost profitability.
- Geographical Expansion: Strengthening branch networks in states like Andhra Pradesh, Telangana, and Karnataka to increase penetration in key growth segments.
- Technology-Led Customer Engagement: Deployment of a CRM system, cloud-based loan processing, and the launch of a super app to create a digital-first banking experience.
Challenges
Despite its strategic positioning, Equitas Small Finance Bank faces several challenges:
- Microfinance Portfolio Stress: The bank is dealing with stress in the microfinance sector, with collection efficiencies declining from 99.4% to 98.2%, leading to higher credit costs.
- Rising Competition: Larger banks and NBFCs are expanding into the bank’s core customer segments, intensifying competition in SBL and vehicle finance.
- Regulatory Uncertainty: The removal of the cap on microfinance lending in 2023 has led to increased customer indebtedness, creating risks of asset quality deterioration.
- Interest Rate Fluctuations: As 80% of the loan book is on a fixed rate, fluctuating interest rates could impact net interest margins (NIM).
- Technology and Cybersecurity Risks: As the bank accelerates digital transformation, it must address potential cybersecurity threats and data privacy concerns.
Key Advancements
- Micro LAP Expansion: Doubling of MLAP disbursements, targeting small businesses with loans between ₹2 lakh and ₹7.5 lakh, backed by secured property.
- Credit Card & Personal Loan Launch: Introduction of new retail products to improve cross-selling opportunities and deepen customer relationships.
- Deposit Rate Adjustments: Reduction of savings and term deposit rates to optimize funding costs while maintaining deposit growth.
- Improved Asset Quality Management: Strengthening collection teams, adding nearly 1,000 employees, and refining risk assessment models.
- Super App & CRM Integration: Developing a digital-first banking experience with a cloud-based CRM and a planned super app launch.
Is Equitas Small Finance Bank a Good Buy?
Pros:
- Strong Growth Potential: Focus on secured lending ensures long-term sustainability.
- Diversification Strategy: Reduction in microfinance exposure lowers risk.
- Technology Adoption: Digital banking initiatives could enhance efficiency and profitability.
- Attractive Valuation: Given its current stress, stock prices may present a good entry point for long-term investors.
Cons:
- Near-Term Profitability Challenges: High credit costs from microfinance stress could impact short-term earnings.
- Regulatory & Competitive Risks: Policy changes or aggressive competition could pose threats.
- Market Volatility: With exposure to interest rate fluctuations, profitability may vary.
Final Verdict
Equitas Small Finance Bank presents a strong long-term growth story but faces short-term risks. Investors with a high-risk appetite and a long-term horizon may find it attractive, while those seeking stability may prefer to wait for microfinance stress to subside before investing.