New normal credit cost for MFI likely 3 – 4% says PN Vasudevan, MD & CEO, Equitas Small Finance Bank

PN Vasudevan- MD- CEO- Equitas-Bank

Equitas Small Finance Bank posted a net loss of Rs 224 crore in the gone by June FY26 quarter primarily on the bank of elevated provisioning. Speaking exclusively to Moneycontrol, PN Vasudevan, MD & CEO of the bank explained the rationale for higher provisioning. Interestingly, he said going ahead, banks ought to look at microfinance as just another business to have, not bet on it entirely shore up return ratios. With increased focus on loans to small and medium enterprises and vehicle finance, Vasudevan believes there is merit to upgrading as a universal bank, though Equitas would be eligible by end of FY26. Edited excerpts:

There were two one off provisioning last year and now another in Q1 FY26. Has it been difficult to call out the pain in microfinance?
Yes, last year we did the one time provisioning twice. We did was in Q1 FY25, we created a floating provision of Rs 180 crores with the objective to bring the net NPA to less than one percent. Then in Q2 FY25, we had a standard asset provisioning for microfinance of about Rs 100 crores. It was a management buffer provision that we created as we felt that there will be stress in microfinance in the subsequent 2 – 3 quarters. In Q1 this year, what we have done are two things – increase the provisioning for NPA in certain buckets which will help improve the provision coverage ratio and provide extra provision against each of the category at different stages of NPA (primarily ageing related provisioning). Secondly, we have done an exercise to find out the potential stress we are carrying in the MFI book and whether we can provide for it up front to remove the overhang on the system. Rs 185 crores of standard asset provisioning in microfinance is arising out of this exercise. Last year, the expectation was that the microfinance stress will die down by Q3 – Q4. But in reality, while in certain states, the microfinance (portfolios) have improved, in certain states, it is not improved; it’s turned a little worse. For instance, in Karnataka, while things are improving, it is still nowhere near what it was prior to the Bill being passed. There has been some impact in Tamil Nadu (for similar reasons). We feel that by Q3 or Q4 FY26 we may start seeing normal levels.

Are credit costs undergoing a reset in the MFI space?
Every crisis moves the normal to the next level. We feel that anything (credit cost) between 3 - 4 percent should be regarded as normal (going forward).
In Q1 you have mentioned that the MFI book is under complete credit guarantee scheme.

Won’t that alter the return profile of the business?
At 3 – 4 percent credit cost, MFI would still be an attractive business. The 1 percent commission to pay for guarantee can be passed on to the customers. It doesn’t affect profitability. But the point is the days of microfinance earning a high level of ROE and ROA is over. We should be prepared to treat microfinance as just other product because the cost of doing this business is also going up. We are increasing the number of people in microfinance by decreasing the clients per staff, because we need to spend longer time with the same customer today compared to the past. It ends up having more people in a branch. You will see some level of moderation in the profitability.

Do you see that the stage being set to upgrade MFI customers to other loans?
SFBs are promoted by RBI for financial inclusion and financial inclusion does not mean only microfinance. If you take our used commercial vehicle segment, almost 80 percent of our borrowers are new to credit borrowers. That’s also financial inclusion. 90 – 95 percent of our small business loans borrowers are new to credit. They are getting into the formal sector and creating a bureau record for themselves.

When I look at some of your non-MFI portfolios small business loans and the vehicle finance together account for a large chunk of loans. Are these the segments you want Equitas to build a recall?
We started this M-LAP (micro loans against property) business in 2012. Maybe there was Sriram (Finance) and City Union (Bank) before us (doing this business). But otherwise, no one else existed in those days. Today, M-LAP is about 45 percent of our book and vehicles is about 25%. Going forward, these two (portfolios) and along with affordable housing which is now about 12 – 13 percent of book will form the core for us.

Are you seeing signs of overleveraging in your secured book given that NPAs in the non-MFI business was also a bit high in Q1?
The average ticket size is about Rs 80 lakh for MSE (mid and small enterprises) loans. The NPA in Q1 is bit of outlier, and over time we should see it coming down as the NPAs are related to some old accounts. The new accounts are performing well. When it comes to the small business loan and the vehicle finance, these are secured loans either the house property or the vehicle itself. The probability of default is low, though they may have taken unsecured loans (from other sources). Therefore, the possibility of getting overleveraged is a concern for the secured loan customers right now.

Yield and NIMs have sharply come off in a year owing to the loan mix. What would you want to tell your investors regarding this?
Yield has reduced largely because of the composition of the book. Going forward, reduction in NIM might stabilize as the share of MFI book won’t reduce sharply here on. Therefore, NIM contraction might slow down. Cost of deposit should reduce going forward as we’ll be closely aligning with what’s happening with the rest of the market. 85 percent of our loans are on fixed rate. In Q1 we didn’t see great benefit from lower cost of funds. But as deposits reprice, the benefit of rate reduction will be visible.

Do you see merit in wanting to become a universal bank?
We will be eligible to apply only post March 31, 2026. There is advantage in being universal bank and that will be a natural aspiration of most of us.