Ladies and gentlemen, good day and welcome to the earnings conference call of Equitas Small Finance Bank Limited's financial performance for Q4 FY25. We have with us today Mr. P. N. Vasudevan, MD and CEO, Mr. Balaji Nuthalapadi, Executive Director, Technology and Operations, Mr. Sridharan N., CFO, Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product, and Wealth, Mr. Rohit Phadke, Senior President and Head Assets, Mr. Jagadesh J, Head of Assets, Mr. Natarajan M., President and Head of Treasury, and Mr. Dheeraj Mohan, Head Strategy. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star, then zero on your touch-tone telephone. Please note that this conference is being recorded.
I now hand this conference over to Mr. P. N. Vasudevan. Thank you, and over to you, Mr. Vasudevan.
Thank you. Good afternoon to all of you, and thank you for taking the time out to dial into our investor call. The last financial year 2025 opened with no indication of what was coming. The first quarter was marginally weaker than normal, but it was laid down to heat waves, general elections, etc. However, the reality hit us in the second quarter of last year when the weakness further deepened. Last year turned out to be a tough year. We had credit costs in microfinance portfolio moving up from 2.3% in FY24 to 11.37% in FY25, wiping away about INR 630 crores of profit of the bank. In response to these headwinds, the bank slowed down its fresh disbursements in microfinance, leading to a drop in the MFI advances from INR 6,265 crores in March 2024 to just around 4,500 crores in March 2025.
This had the double impact of high credit cost and lower income reflected in the rather unimpressive ROA of 0.32% for the financial year 2025. If we step outside of microfinance, the rest of the advances grew by 19% for the year. Credit cost remains very comfortable at just about 1%. Very importantly, our yield on advances has remained steady during the year around 16.3% in spite of reduction in the microfinance book. The cost of funds to the bank remained more or less steady at around the 7.5% level for the full year. The NIMs went down for the year from 8.36% to 7.51%, largely contributed by the mixed change in the loan book. In the last year, we also stopped giving our normal guidance in view of the evolving crisis in microfinance. Coming to FY26, we believe we have many things under better control.
To highlight a few, collection efficiencies in microfinance have come back to near normal, and expected credit costs should settle down to normal levels by the third quarter of this year. The size of the microfinance book is expected to reduce from around 4,500 crores of March 2025 to about 3,000 crores by March 2026 as we strictly implement the guardrails and originate fresh loans largely from existing clients. The contribution of MFI to total advances is expected to reduce from 12% in March 2025 to mid-single digit by March 2026. This is expected to reduce the impact of any further unexpected headwinds in the MFI sector on the bank. Small business loans, used cars, and used CV finance continue to grow profitably with credit costs under control. Affordable housing and MFI finance is expected to turn profitable this year.
Major parts of the large projects such as CRM, the native IBMB app, credit cards, and AD1 project investments in these large projects, most of the investments are behind us, and additional investments in these should be nominal. The cost of funds is stable and expected to come down after a few quarters as repricing of deposits and lower rates take effect. We remain focused on accelerating growth and improving the bank's ROA and ROE as this is a top priority in the coming year. We expect to exit the fourth quarter of this year with an ROA greater than 1% on the way to reaching an improved ROA of around 1.5% to 1.75% over the next few quarters running into FY27. Lastly, before we move into Q&A, I'm happy to welcome and introduce Balaji Nuthalapadi, who joined us recently as an Executive Director for Tech and Ops.
Balaji is an alumnus of the Indian Institute of Management, Ahmedabad, and joins us from Citi, where he worked for over 28 years across five countries. At Citi, he was the head of Citicorp Services India Private Limited, employing about 31,000 people and constituting the largest island base for Citi outside the USA. Also, Balaji served as Head of Ops and Tech for the Citibank South Asia Subcluster from 2021 to 2024. He is also a member of the Tamil Nadu FinTech Governing Council and a member of the Strategic Advisory Group of the Indian Institute of Information Technology, Andhra Pradesh. I would once again like to welcome Balaji on board. Rohit Phadke, who heads our assets, is retiring by June 2025. Jagadeesh, whom we call as Jagi, will be taking over from him.
Jagi has been with the bank for 15 years and joined us as an area manager. Over the years, he has built our microfinance and our flagship product, SBL, into what it is today. He has been the business head and managing this product for over five years now. I'm sure some of you might have met him earlier. After he completed his MBA from Bharathidasan Institute of Management, Trichy, he had worked in companies like HLL, Apollo Tyres, and ICICI Lombard before joining Equitas. He will be taking over from Rohit as business head of assets, and Rohit will be spending the next couple of months mentoring him into this position before he retires. So that's it from my side.
To sum up, we can say that the last year, as I mentioned, was really a bad year, and we are hoping that this year will be a much better year, basically because lots of the fundamentals have been strengthened. With the microfinance portfolio coming down, the headwinds, if any unexpected headwinds do come also, the impact should be hopefully much lesser. We, as a management, remain committed to ensuring that our ROAs and ROEs reach the normal level as early as possible. Now, I hand it over to Sridhar.
Good evening to everyone. I shall quickly give you an overview of our financial performance for the quarter as well as for the year. Most of this is already covered in our presentation. Our net interest income and other income for the year was 3,252 crores and 871 crores, respectively. The total treasury income for the year stood at 142 crores, registering a growth of 36%. Net income for the year stands at 4,123 crores, registering a growth of 9%. Our yield on advances for the quarter stood at 16.30%, and the yield on disbursement dropped by 140 basis points on Q on Q basis to 16.76%. The drop was largely due to a slowdown in microfinance. Microfinance disbursement stood at 8.32% of the overall disbursement in Q4 FY25, besides 29% in Q4 FY24.
On the cost side, operating expenditure for the quarter came at INR 736 crores, clocking a growth of 16% over the last year's same quarter. During the quarter, the bank purchased PSLC certificates, incurring a cost of INR 11.04 crores, and for the entire year, the cost was INR 16 crores. For the whole year, the total operating expenditure went up by 15% as the bank invested in technology, people, and new products. Cost-to-income for the entire year increased to 67.64% from 63.74% last year. PPOP remained flat for the year at INR 1,334 crores. Credit cost for the quarter came in at INR 258 crores, majorly contributed by MFI with INR 185 crores. The bank made an additional NPA provision of INR 33 crores in microfinance and vehicle finance. The total credit cost for the year stood at INR 1,135 crores. The bank's GNPA stood at INR 1,068 crores and NPA provision of INR 714 crores.
Our PCR now stands at 66.83%, and including technical write-off stands at 82.01%. PCR for individual product segments are already given in the PPT. As of March 31, 2025, the total CRAR stood at 20.6%, with Tier 1 at 17.84% and Tier 2 at 2.76%. With this, I hand over to Rohit.
Thank you, Sridhar. Good evening, everybody. Advances at INR 37,986 crores grew by 11% year on year. SBL advances has grown by 25% year on year. The collection efficiencies in SBL are very stable. Across the year, the expected collection efficiency was more than 99%. In the last quarter two, it was 99.2%. The merchant overdraft book in SBL has grown very well. It's now a INR 1,400 crore book with about 51,000 customers. We believe that this is a product which fulfills a dire need for small and informal customers. Our intent will be to grow this book this year. The Selfe loan app was launched last year. It is primarily a lead sourcing app, and we have sourced about INR 1,247 crores of loans. These loans were disbursed from the leads that were sourced through the Selfe loan app.
In the CV segment, we have grown by 14%, but this 14% is a misnomer. The growth in used car was 53%, and the growth in used CV was 24%. We chose to degrow the new CV book by 13%, and hence the overall CV growth dropped to 14%. The focus in vehicle finance is to grow both the used CV and used car books. Collection efficiencies in vehicle finance have been looking up last quarter. The old auto book, which was 16% in the previous quarter, has now come down to 14.5%. The expected collection efficiency has also moved to about 99%. We will continue to grow the used car and the used CV books. The housing book, also the affordable housing book, also continues to grow well. It's now, it's grown 14% year on year. The MSME portfolio has also grown at 41% year on year.
So this is also a segment that we are seeing good growth. The microfinance degrew by 28%, and this is by choice. The book stands at about 12% of the overall mix. The entire microfinance team has been trained to now do Micro LAP, and our intent is to keep degrowing microfinance and keep growing the Micro LAP book. In the coming months, as the microfinance book degrows and the Micro LAP book grows, we see that an era of uncertainty will disappear, and I see a very glorious future for the bank. Thank you so much. Over to Mr. Murali, please.
Good evening, friends. As you would have gone through the presentation, our segmented approach, what we have been discussing, has been yielding good traction in terms of quality customers. If you see the elite book, which is our focus between middle class plus to HNI, is showing a very steady growth, and we are seeing close to 25%-26% of growth in elite as a key segment, and as we are talking about liabilities too as a strategy in the last as well as previous presentations, our focus on NR as well as transaction-centric banking is helping us to expand A, the footprint, and B, the spread of customers.
Today, I think in NR book, we have customers who are present across 140-plus countries, and we have close to INR 3,000 crores of book coming from NR, which is the first step, which is augment our next initiative of AD1, which should go live very soon. Third part, in terms of business banking, that is current account, our focus on retail merchants is helping us to acquire lower-end spectrum of current account with the intelligent solutions, which we will try to offer through QR as well as POS in coming months, should help us to grow the current account also.
B, in terms of transaction banking, our important focus is how do we get the active savings account in coming days so that new mobile banking and internet banking app, which we have come up, and today we are running both the apps together, and we are happy to say that new app, despite being there, have a download of close to a lakh now at this point of time. So I think that user interface and user experience is going to help us to move ahead. We have launched very critical UI/UX-based initiatives, what we have mentioned in terms of Banker on Wheels, as well as service-centric approach, which we will discuss later. And RTD has been a good year. Last year, we could add close to 1.2 lakh customers who have actually come in and used our new retail TD proposition.
So that has helped us to keep the retail ratio also close to 69%-70%. And I think increasingly, we have to hold and grow that base and see how best we can penetrate more on product holding. So overall, it was a challenging year. The future, what we are seeing through version two, what we have liabilities too, which we have mentioned, should give you the perspective on where we stand in terms of individuals to other as a deposit categories. So retail mix is one healthy mix, which we will continue to focus with segmented approach. Thank you.
We will open for Q&A now.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Renish from ICICI. Please go ahead.
Yeah, hi sir. A couple of things from my side. One on this SBL book, right? So sort of we are sounding quite confident about scaling this book in FY26. But when I look at this slippage ratio, sort of it is increasing quarter by quarter, impacting Q4 this year as well. It has gone up. So what is giving you the confidence to grow this book when daily slippages are also going up sequentially?
Yeah. So basically in the SBL book, the MLAP has really grown strongly last year. And MLAP typically has a loan size ranging from 2 lakhs to 7.5 lakhs. That's what we internally classify as a Micro LAP. Typically, the Micro LAP does have a higher level of GNPA. But because it's a secured product, the ultimate credit cost actually turns out to be quite low. So I'm going to request Rohit to answer what's the typical GNPA of MLAP and what's the credit cost that we have seen in MLAP over the past so many years.
But what I can say beyond data is that over the last maybe what, 12 years that we have been doing Micro LAP, we have gone through the demonetization period, we have gone through the GST period, we have gone through the corona period, and we have gone through the last year microfinance drift. And through all these periods, the credit cost of Micro LAP in particular and SBL in general has been extremely comfortable. So I'm just going to leave it to Rohit to give the data in terms of credit cost and GNPA for MLAP.
So see, we've been seeing Micro LAP now for quite a few years now. I think two cycles we've seen it. It's nearly a 2,600 crore book. And the GNPA has hovered around between 4-4.5%. The credit cost is only 0.4%. And if you look at the overall credit cost for SBL, it's just 0.3%, and MLAP is just 0.4%. Also, what we have seen is a lot of these, we don't have to really go and repurchase properties. A lot of these properties, they come off a settlement as the customer does not want to lose his only property. So overall, we do think that Micro LAP is a very good product, and we should really increase it.
So again, I'm just sorry to follow up on that. So Micro LAP, I mean, of total INR 60,000 crores of book, as you said, Micro LAP is roughly INR 3,000 crores. So I'm sure the bulk of increments slippages over the last four quarters is actually coming from a legacy book. So is there anything, let's say, any of the geography or any events which are happening in some pockets and that is leading to this bleed, which might be temporary, and hence you are confident that going into FY26, the slippage ratio will sort of come back to normal? And that's why we are confident on going SBL book.
Is there any particular geography we see any stress?
So we have not seen any stress in any particular geography. So I see a good future. I have not seen any particular stress in any specific geography for this slippage.
Slippage has been higher in the last year.
Slippage has been higher.
I think that's.
Actually, maybe I will take it offline. I don't know what you said.
Actually, we don't see any underlying stress, and this is a product that will continue to remain a key focus for the bank.
Got it. Got it. And sir, my second question on the vehicle finance book, right? So you did mention that new CV, which shows not to grow maybe because of the lower OEM sales this year. And we are equally confident on growing new CV, CV book. So just wanted to get a sense, this entire TN issue, which is there because of the bill, do you expect any impact of this bill on any of our product segment? I mean, apart from MFI?
Not really. We don't. I mean, we have gone through a similar thing in Karnataka a few months back, and there's really no impact on anything else.
Got it. Got it. And would you like to guide us on credit cost in FY26?
The credit cost for FY25 was 3.15%. Correct? 3.14% credit cost. But that included a one-time INR 180 crores of floating provision that we created in the first quarter of last year. But if you remove that INR 180 crores, the credit cost would come to around 2.6% for last year. Now, the question is that do we want to guide for credit cost this year? We will want to definitely guide, but we are going to just wait for this one quarter to go by because first quarter and second quarter of this year, we expect the credit cost to remain at a higher level, basically because of the lag effect of slippage of expected microfinance in the last two quarters. They will all hit us in the credit cost with a lag of around two quarters.
So that way, we are going to have some amount of credit cost coming up in the first and second quarter of this year. But from third quarter onwards, we expect that to actually go down and get into more normal levels. So I think we'll start giving a guidance on that at the end of this quarter. We should be able to guide for the full year.
Got it. Got it, sir. That's it, sir. Thank you and best of luck.
Thank you, Renish.
Thank you very much. The next question is from the line of Mr. Rajiv from Yes Securities. Please go ahead.
Yeah, hi, good evening. Sir, can you share an outlook on loan growth? Because see, you've given some color on the ROA. So there is an underlying growth assumption in that ROA outlook also. So what is that growth that you're looking at the overall book? Because see, different pieces are moving in different directions. Because MFI, as you've communicated, is going to come down further. Affordable housing is actually growing slowly versus your peers. And in new CV, you are refocusing even there, the book is shrinking. So how should we look at the bank-level growth in FY26? And what has been your ROA assumption of maybe exiting the year with 1% plus ROA?
Yeah. So microfinance will degrow, as I mentioned, from around 4.5 thousand crores. We expect it to land at around 3,000 crores by end of this year. But in spite of that, we expect an overall credit growth for the year, which should be in the late teens. That's what we expect for the full year. Late teens is the credit growth that we should be looking at. And that's what is factored in for the guidance of more than 1% ROA by the fourth quarter of this year.
And sir, when I look at your non-MFI SMA pool on Q1, Q basis, there's not much improvement. So I mean, and so is the new flow persistently coming from the X bucket into the SMA pool across products? And is that a challenge that the new flow rate is not improving, or are the rollbacks not happening in the SMA buckets? The resolution is not happening. Is that a problem?
If you look at the SMA non-MFI book, we are talking of what is the gray line?
Gray line is the latest one.
60-90, 1.49%, 1.69%. SMA 2 was 1.69% in Q3. It's come marginally down to 1.5%. Now, SMA 1, which is 2.7%, is down to 2.8%. And SMA 0, which was 3.9%, has come down to 3.65%. So I mean, I don't see that the SMA.
No, it's stable. Sir, I agree with you. It's pretty stable. It's not deteriorating for sure. But from an improvement point of view, since if you want to kind of go down on the credit cost, even on the non-MFI book from where we are, so these buckets will also have to improve.
See, as far as the credit cost for the non-MFI book is concerned, it was around 1% last year. And we expect it to be at. I mean, that 1% is more or less like a normal level. We do not really expect that to go further down. I mean, it may marginally go down by a few basis points up or down, but it will not be dramatically lower than that. That's a very normalized level of credit cost. So this SMA book also, you see that 0 to 90 or whatever, SMA 0 to 2, it will be at these levels. We don't expect that to really come down. And credit cost is also at reasonably normalized levels, around that 1% level. And these products are priced for that level of credit cost.
The profitability should not be an issue because the pricing takes care of that level of credit cost, and we must understand that these are customers where our average ticket size is just about INR 700,000. If I remove microfinance, that is assuming I don't count microfinance, I just look at the rest of the book, our average ticket size on lending is just INR 700,000, so we are really addressing the seriously low-income profile who are from the informal economy, and some level of delinquency and some level of behavior in terms of on-dot repayment will be a given, and these are very normal levels. I don't see that this should be an issue.
Okay. And just one clarification about that stressed sector provisioning of 100 crores we did in Q2, which was essentially on the microfinance SMA pool, I believe. Now, how do we look at that number? What is the corresponding number now? Do we still hold that provision on the MFI SMA book, or has that got utilized, and now it is a part of the PCR?
It's a little better. 38.4. Okay. So we have created a INR 100 crore provision in the third quarter, sorry, in the second quarter of last year. On the SMA 1 and 2 books, basically, we have some internal parameter. Out of SMA 1 and 2, we took some parameter like how many of them have loans beyond a certain number from different lenders, and how many of them have beyond certain level of exposure as a borrowing. So we took some profile of those customers who are in that SMA 1 and 2 bucket in September, and we said these are the stressed customers. And so we made that advance provision of INR 100 crores. Now, that profile is continuing to be used on this SMA book in the month of December and in the month of March.
Since that profile of that segment of stressed customers, as per that profiling, has been coming down from September to December to March, it's been coming down. In December quarter, we used the provisions of approximately 38 or so crores out of that 100 crores because the amount of stressed customers within that segment had come down. Further, in the quarter ending March, we have utilized another about 23 crores we have reversed back because the level of stressed customers has further come down. That's how it is. Currently, we are carrying about 38.3.
38 crores we are carrying still in the books out of that INR 100 crores.
Okay. Clear. Thank you so much, Industry.
Thank you. Bye.
Thank you very much. The next question is from the line of Nitesh from Investec . Please go ahead.
Thanks for the opportunity. So first question is that what is the steady-state ROA that you think a bank can deliver from a, let's say, next two- to three-year perspective when the entire product mix stabilizes? What is the steady-state ROA that a bank can deliver, and what is the long-term thought on microfinance, whether we will take it to zero?
So on the microfinance, we will be applying the guardrails very strictly. And also, a large part of the sourcing is restricted to existing clients. So we are not really out there to try and grow the market share or grow the disbursement. So we will only disburse to well-performing existing clients, which means that the percentage of microfinance, the quantum of microfinance, the book also should be coming down over the next few years. Whether it will go to zero, I'm not going to be able to say that. It may not go to zero because ultimately, there will still be certain customers who are very good and continuing to be with us and performing very well. So it may never go down to zero, but it will keep going down at a percentage. As far as steady-state ROA is concerned, Dheeraj?
Yeah. So Nitesh, what visibility we have right now is to look at FY27. And from that perspective, we've given a range of 1.5-1.7. I think let us first hit that for a few quarters and then see what more we can expand our ROAs. But at this point in time, let's focus at FY27, and we'll then discover what steady-state is.
Sure. And that is for FY27 or exit FY27? Exit quarter?
I think FY27, at least in a few quarters, we should be between that 1.5 to 1.7 ROAs.
Sure. Sure. In which segment do we have bought PSL?
We bought PSLC in the small and marginal farmer category. Actually, what happened is that we were looking to be a little short on that, so we didn't want to take a risk, so we bought it. But at the end of the period by March, our incremental asset PSLC category itself was actually sufficient. But by then, we had already bought because we didn't want to take a risk. But it was in the SFMF category.
With the microfinance further coming down, let's say, over next two to three years, how do we plan to get SMF category fulfilled on PSL?
Yeah, so that's the challenge for the team, and that's what the MLAP product that the microfinance team, I think we mentioned that in the last con call, the microfinance team, because they will not be totally tied up in terms of disbursements on new microfinance loans. And so that bandwidth is being allocated for them to enable them to do micro-LAP. And micro-LAP, as you know, is typically a semi-urban to a rural product. And so the end use of the customer, the end profile of the customer borrower, quite often does come as an agricultural profile. So most of the sections in SFMF category for microfinance should be compensated by the MLAP.
Sure. And can you share the liability OPEX number for FY25? What is the OPEX of liability franchise for FY25?
Yeah. One second, Nitesh.
Yeah.
So their cost after allocating common cost altogether is about INR 750 crores. From this, they have given the income they generate from third party and other products. But the direct OPEX is INR 750. This includes allocated costs also.
What allocated?
Yeah. There is a head office cost allocated, there is a technology cost allocated, there are some common resources like us which gets allocated. All of those costs are added to this when I say 750.
What is the direct cost?
Direct cost.
I think the direct cost is allocated to the business. You have tech cost. No, tech is small amount. I don't know. I just know it's not there. This is its cost. Allocated to the job. It's 120.
Direct cost is 750, and the allocated is about another 120 above that.
Okay.
So we have been trying to reduce our lending cost of liabilities vis-à-vis large banks. So is there an update on that, how that is progressing? It seems like our lending cost of liability has gone up sharply in the FY25.
Yes. The lending cost of money has gone up in FY25, principally because the cost of funds went up from 6.5% to 7.5% in the year. So 1% increase in cost of funds really resulted in the lending cost of money going up in FY25, whereas the other elements of the lending cost, which is the cost of raising the money, actually went down. Because basically, we are not increasing the I mean, the deposit is growing at a rate higher than the operating cost of liability team. So obviously, the leveraging is continuously kicking in. So the cost of raising the money, that percentage went down from 24 to 25, I mean, FY24 to FY25. But the interest cost itself went up by 1%. So the overall lending cost of money had gone up.
What we will do is I don't want to give you any ad hoc number at this point in time. Next quarter presentation, I'll request Dheeraj to put out a slide on this so that we can trace the trends and also look at how it is progressing towards this year.
Sure. Last question then. Have you seen any impact of the TN ordinance as of now in terms of collection behavior in microfinance?
No, no. Nothing as of now. There's a difference between what happened in Karnataka and what happened in Tamil Nadu. In Karnataka, there was a lot of disturbance in the market, a lot of articles, newspaper reports, and TV reports about various kinds of practices and all that going on for about a couple of three months, and the ordinance came at the end of that. Whereas in Tamil Nadu, the situation is very different. I mean, there's absolutely no news reports or anything at this point in time. This ordinance is something probably the government is looking to do on a proactive basis and not as reactive to something which is happening on the ground, so I think that's the major difference, so as of now, we don't see any difference.
Yeah. Thank you, sir. That's it from my side. Thank you.
Thank you, Mateus.
Thank you. The next question is from the line of Vibhav Khandelwal from Laburnum Capital. Please go ahead.
Yeah. Thank you for the opportunity. I wanted to understand in the MFI book, how do we see the impact of the incoming guardrails?
Of what?
Guardrails.
Guardrails.
Guardrails.
Yeah.
Okay. So I think we mentioned that in the last quarter con call also. We gave some data. 48% of our existing MFI clients are not eligible for fresh funding because of the guardrails. That's the information that we had shared last time also. So that's the impact of the guardrail implementation. And this means any part of the guardrail. For example, if they have already borrowed from three, then they are not eligible. If they have already borrowed more than two lakhs, including other loans, not eligible. Also, they may be on X bucket with us, but they may have an overdue with some other lender. And if that overdue is more than INR 3,000, then again, they are not eligible. So on all parameters put together, about 47% of our customers were not eligible. Understood.
But just to get some sense, what's our overall estimate as to what the impact would be on credit cost or collection efficiency because of this?
Because of what?
With the guardrails. Any incremental impact?
We don't expect anything. I mean, we have implemented the guardrail right from January, and our collection efficiency has actually been improving between January to March, and even in April, it's further showing signs of improvement, so we don't see any issue between these two.
Understood. And my second question was regarding the used CV book. Now, we've seen that we have very good growth that is coming in the used CV book. I just wanted to get some sense on the competition, pricing, etc., that you've seen in this particular portfolio.
Right. So the competition, there are a few NBFCs who are active in this, like Sriram, Mahindra Finance, and Chola, and all that. Practically, we don't see much of banks in that space. The yield from used commercial vehicle typically is in the range of around 18%-19%. That's the range. The type of products that we lend can cover both, I mean, heavy commercial, light commercial, and small commercial. However, as far as Equitas is concerned, the largest contributions come from small and light commercial. Heavy commercials contribute much less. The yield, as I mentioned, on an overall basis from used CV will be normally that range is between 18%-19%.
Understood. No, that's helpful. Also, the point to understand regarding the liability franchise, right? Now, we're seeing the CASA, the savings account growth, being sort of on the lower end on a year-on-year rate basis. Just wanted to understand how do we plan to improve our cost of funds if our CASA ratios are trending downwards? I mean, I understand that there's been an equity placement in the system, but given that we're a small part of the overall system at the moment, just how do we see cost of funds improving given the low CASA growth?
Yeah. So there are two elements to the cost of funds. One is, of course, just reducing the interest rate itself. That is one element. Second is, of course, improving the CASA ratio, and within the CASA ratio, improving the current account ratio will be another element of cost reduction, cost of funds reduction. As far as the first point is concerned, which is the cost of the interest rates that we pay on deposits, we have been trying to consciously reduce the interest rates on deposits that we pay. So in the month of October of last year, we reduced the peak deposit rate by 25 basis points from 8.5%-8.25%, when it was actually there was no change in deposit rates from the other banks, but we reduced it just to help us reduce the cost to some extent.
And that will have a benefit somewhere another two quarters down the line. We should see the benefit of repricing on that. Also, we had reduced the savings account interest rate a few slabs. We had tweaked in the last year twice. And this year, again, in the month of April, we have reduced the peak deposit rates by 20 basis points. So 8.25 has become 8.05 as a peak rate now. And effective, I think, 1st May, we have already announced. We have communicated to our depositors. There is a further tweaking on savings account rates. The lowest slab, which was 3%, is now going to be reduced to 2.75, and some marginal drop in interest rates on further buckets in the higher levels also.
So that is one element of cost of funds reduction where we are consciously trying to reduce the interest rates, which will help in reducing the cost. The second one is, of course, in terms of growing the CASA as a book, last year was difficult for us. The CASA didn't really grow much. And as a result, CASA ratio came down from 32% to 29%. So I'll just ask Murli to kind of share this year, what do we plan to do to try and improve the CASA ratio from 29% to a little higher %? So I'll ask Murli to share on that part of it.
Yeah. Hi. There are three things which we discussed. One is going deeper with regard to family banking, that is getting the elite segment in and getting the family banking accounts. Second is what we discussed on merchant acquiring Apps for current account and getting that differentiated solution. So CA actually brings down the cost of funds. Third is leveraging on AD1 and getting NR as a segment. So these three are key to get value. And to get the mass banking and proposition right, we are going live for Corp Sal D2C, which is end-to-end digital journey from origination to V-KYC, where we are going to go deeper at corporate level. So these four should actually help us in garnering more number of accounts.
It's actually one more thing that will happen is as the arbitrage between SA and TD keeps shrinking, the quantum of money that keeps getting into the SA will actually go up. Last year, we had hook product of ASBA and SAP helping us. We will go deeper through that route also to get the spread depth and digital leveraging right.
Understood. That's all from my side. Thank you so much.
Thank you. Thank you, Vibhav.
Thank you. The next question is from the line of Shreepal Donje from Equirus. Please go ahead.
Hi, sir. Good evening. Thank you for giving me the opportunity. So my question was on understanding the ROI profile for SBL and vehicle finance, and then within SBL also, if you could give some color on Micro LAP and G Lab. That's my question, sir.
So we don't share the product-wise or subcategory-wise ROIs. We don't share that publicly.
Okay, but some color on SBL as a category?
Dheeraj?
Yeah, so the easiest way to understand these businesses is to do a sum of parts. Our SBL book is very similar to some of our competitors who are in similar geographies, so you can look at their numbers. It's very similar.
Yeah. They will look at anyway.
So I'm just saying, in easiest way, it is very correlated to that. Similar from a vehicle finance, it's similar.
Yeah. The yield is there on the, so I'll give you rough yield. SBL is roughly about 16% is the yield. Vehicle finance currently is about 15.5%, likely to go up as new CV comes down. So those are the yields. But at this point in time, we actually don't want to give ROIs. So we give credit cost separately?
Credit cost is no, PCR.
Got it, sir. That is helpful. I'll maybe take it up separately. Just another question was on asset quality front, so if you look at the Stage 3 or GNPA in HL and SBL, also highlighted by one of the earlier participants, has been increasing.
Sorry to interrupt you, sir. The audio is not clear.
No, no. We can hear you.
That's fine.
Yeah. Okay, so my question was on rising GNPA in HL and SBL, while these two segments have been growing at a decent rate for us, but the NPAs have also been inching up, so are we taking any measures to sort of contain this going ahead, or we are comfortable with this level of NPA, especially in HL and SBL both?
SBL, even when we do when we plan for SBL, these are the numbers which we take. This is in a comfortable range given the yield and the nature of the product. SBL, when you see the GNPA of 2.54%, it is actually within a comfortable range. It can actually go up for the yield the product offers. For home loans, understand that the profile of our customers are self-employed. They are not the prime segment. And increasingly, we are also growing the self-employed own construction space. I think housing finance is where you can assume a steady state GNPA. SBL has composition changes with MLAP going up. It has the room to inch up a little higher. But those are what we consider are normal levels for those products.
Got it, sir. And last question was on the loan book mix that we're targeting for, let's say, FY27 sort of a time period.
Loan book mix for FY27?
What? Loan book mix for FY27?
Loan book mix for FY27?
If only give an indication on where microfinance will be.
Microfinance, as I mentioned, should be in the mid-single digit by FY26, right? Which means that by FY27, microfinance may come below the mid-single digit. That will be the contribution of MFI. But the rest of the book, by and large, they will remain where they are. I mean, small business loan will be around that 45% level, affordable housing around 12%-15%. I mean, all of them may go up by 2%-3% because MFI book is dropping, so they'll be taken up by some of the others. But there'll be no major dramatic shift in the rest of the book.
Got it, sir. Got it. Thank you. No plans of having any new products as such, right?
See, the new products are two, which we have just launched, which is credit cards and personal loans. But personal loan will be strictly for the cross-sell purpose, so we are not pushing personal loan as a standalone product. It's significantly only meant for supporting the stickiness of deposit customers. So it may not be a much volume driver. It's more of a relationship driver and not a volume driver, so it will never be a big contributor. Credit cards is something, again, we have launched. Again, credit card is largely meant for existing clients. Credit cards will be something which we'll offer to both asset customers and liability customers. In asset customers, so normally on a standalone basis, most of our asset customers may not be eligible for standalone credit cards from other banks.
But since we have an underlying security from them, so our exposure on credit cards will be also secured by the underlying property, and that gives us the comfort of giving them a card with some limit on that. So again, both of them are meant to be cross-sell products. So we are not going to be pushing huge volumes on that, but principally, it will be driving cross-sell. So there's no other new product that I think we'll launch over the next two years. We have a complete bouquet of products, so now the challenge is only to keep growing on the platform that we have.
Got it, Dheeraj. Thank you for that detailed answer, and good luck for the next quarter.
Thank you. Thank you, Shreepal.
Thank you. The next question is from the line of Darshan from Indvest Group. Please go ahead.
Hi. Thanks for the opportunity. So my question was regarding the microfinance segment. If you compare the X bucket collection efficiency of Equitas's reported numbers versus that of other SFBs for the March month, sorry, Equitas seems to be lagging behind, both in Karnataka and rest of India. For example, in Karnataka, we see that it's lagging by potentially 600 basis points compared to some of the other peers. And in rest of India, all of India is lagging by about 100 basis points. So what, in your opinion, explains this large difference in the X bucket collection efficiency?
See, two things. One is that we wouldn't know what others are doing, so that's the first point. The second point is that consciously, as I mentioned before, we have been reducing our disbursement on microfinance for the last year, leading to a 27% drop in the book. And because of that, automatically, the X bucket collection efficiency as a percentage for us may look a little lower compared to others because you do a large disbursement this month, for example. Next month, practically all of them are likely to pay their first EMI, and so your X bucket as a percentage may look better compared to somebody who is disbursing lesser.
For us, what will happen is that over a period of time, as the microfinance book keeps shrinking, we may actually start giving out the amount, and rather than the percentage, we may actually start giving the amount, X bucket collection efficiency in terms of amount rather than percentage because that may become more relevant for us. The quantum of money, which quantum of loans which become delinquent, may be more relevant for us than a percentage as the book shrinks.
Got it. I mean, that explains it. My second question was, again, with respect to microfinance. So obviously, we have seen a lot of pain in the microfinance space. And excluding microfinance, I think we've built a pretty good book on the asset side, whether it's SBL, whether it's home loans, whether it's vehicle finance. But now with these guardrails coming in in terms of the cap on the number of borrowers and the cap on the amount that can be lent, and also things like CGFMU, etc., which sort of gives some protection in case of downside, does that change the attractiveness of microfinance? Should we be rethinking of microfinance or exposure to microfinance as in not being so negative about it? How do you think things have changed fundamentally after the guardrails?
So we have been having guardrails from 2010 onwards, before the AP crisis. Before the AP crisis, MFIN was born in the month of March 2010. The AP crisis happened in October 2010. Sorry, MFIN was born in 2009. And October 2010 is when the AP crisis happened. But before the crisis happened, MFIN had come out with its own set of guidelines for all of us, which included the cap on number of lenders, the cap on the total amount of loan to be given to a borrower, etc. So these guardrails are not exactly new. This is something that we all sat together and implemented long before the first major crisis, long before RBI stepped in, long before the SRO as a concept came up and was approved by RBI, long before that.
And in spite of that, we have been seeing a series of crises in the microfinance sector time and again for various reasons. The reasons change, but the repetitiveness of the crisis doesn't change. So I think from Equitas' side, we are very clear in our view that over time, microfinance will continue to go down and be a much smaller and smaller part of the book so that any problems in that space should not really put us into the kind of situation that we found ourselves in last year. And our ability to deliver a sustainable performance and a sustainable return is what we are looking to build. And that is where the approach to microfinance very clearly for us, we are very clear on that.
Got it. Thank you. That's very helpful. That's all from my side.
Thank you, Darshan.
Thank you. The next question is from the line of Ashlesh from Kotak Securities. Please go ahead.
Hi, team. Good evening. First question is on the MFI book. Firstly, what do you do with these set of borrowers who are ineligible for additional funding? And I understand you are probably cross-selling, migrating some of them to the Micro LAP book. What are the filters which you apply to determine what is the eligibility here?
So those who are not eligible, of course, we don't fund them. But as I mentioned to a previous caller in this call, he asked me a question that if you are not going to be funding again because of the guardrail, does it have an effect on your collection efficiency? I had already answered that for somebody else, saying that our collection efficiencies have actually been improving in the last few months post the implementation of guardrail, very strictly from our side. We are extremely strict in implementing the guardrail, but we haven't found our efficiency actually going up, so we don't have an issue on that. Now, the second thing is, of course, what do we do with the customers? If they are good, can we convert them into the MLAP product? That's our whole focus.
And that is why, as I mentioned earlier, the MFI team, which is available on the ground, and they have the relation with the customer, they have the knowledge of the customer, the relation with the customer all established, and they are on the ground. Now, I can't do microfinance to them because of the guardrails. I can't do that. But are they eligible for MLAP? And if they're eligible, then we can convert into that. And for MLAP, the filters that we use are basically it's an individual credit cash flow based credit appraisal. That's the filter that we use.
We have a full set of credit norms for MLAP, which includes a visit to the customer's place of business premises, trying to understand his cash flow from his business, expenses, etc., get his credit bureau reports, find out his ability to pay EMIs, and work backwards the loan that he is eligible to that he can maximum service. So we actually back-calculate the loan eligibility. And that's how it is done. And we have random sampling by the credit teams to confirm that everything is in order. So these are processes we have put in place over the last 12 years. And those are the same filters that we use for moving an MFI borrower who is not eligible under the guardrail. But if they're eligible under MLAP, we'll move them to that.
Understood. Thank you.
Thank you, Ashlesh.
Thank you. As there are no further questions, I would now hand over the conference to Mr. P. N. Vasudevan for closing comments.
Thank you. Thanks to all of you for dialing in, and thank you for raising all your queries and keeping us on our toes. And as promised in the beginning of the call, the management is completely focused in terms of delivering proper returns to the investors. It's a question of time, and we are also waiting for the time, but meanwhile, the effort goes on. Thank you so much, and wishing you guys all the very best.
Thank you very much. On behalf of Equitas Small Finance Bank Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.