Concurrently, the agency has reaffirmed the bank's short-term rating at 'CARE A1+'.

CARE Ratings stated that the rating reaffirmation to debt instruments of Equitas Small Finance Bank (Equitas) factors in long track record of operations with diversified asset classes, comfortable capitalisation levels, and an adequate liquidity profile.

Ratings take note of improvement in its deposit franchise, where credit to deposit ratio significantly improved to 78.28% as on 30 June 2025, from 85.08% as on 30 June 2024.

However, ratings strengths are partially offset by regionally concentrated business, and moderate asset quality due to marginal credit profiles of borrowers.

Ratings also consider deterioration in profitability due to increased credit costs as the bank made higher-than-required provisioning on its portfolio in microfinance and small business loans portfolio, which has been witnessing stress in Q4FY25 and Q1FY26.

While the bank expects improvement in business performance in H2FY26, its ability to improve its collections, maintain asset quality and improve profitability remains a key monitorable.

The bank has been reducing the proportion of its microfinance advances to total advances which reduced to 9% as on 30 June 2025, compared to 12% as on 31 March 2025.

The bank has been making write-offs and additional provisioning to maintain gross non-performing assets (GNPA) ratio below 3% and net NPA (NNPA) ratio below 1% to meet the criteria laid by Reserve Bank of India (RBI) for small finance banks (SFBs) to get Universal Bank license.

As a result, the bank's return on total assets (ROTA) declined to 0.30% in FY25 from 2.00% in FY24.

In Q1 FY26, the bank reported losses following change in bank's provisioning policy resulting in higher provisioning and one-time management overlay provision on the microfinance portfolio.

Equitas Small Finance Bank (ESFB) is a Chennai-headquartered small finance bank (SFB), which commenced its banking operations on 05 September 2016. ESFB is currently focussed on the retail banking business with focus on microfinance (MF), vehicle finance (VF), housing finance (HF), business loans, loan-against-property (LAP), and providing financing solutions for individuals and MSEs that are underserved by formal financing channels while providing a comprehensive banking and digital platform for all. As on 30 June 2025, the bank had a network of 1,035 banking outlets, with deposits of Rs 44,379 crore and gross advances of Rs 37,610 crore.

The scrip rose 0.09% to currently trade at Rs 55.00 on the BSE.

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