Equitas starts pre-paying high-cost bank loans

MUMBAI: Equitas is beginning to feel the benefit of becoming a bank, even though it is classified as a small finance bank. Having started its banking journey earlier in the month, it is in the process of pre-paying existing bank loans worth `3,000 crore raised at a higher cost by cheaper funds which is going to boost its net interest margin and profitability .

“This is the first phase of our strategy...to replace high-cost bank loans by funds raised at lower cost,“ Equitas Small Finance Bank managing director PN Vasudevan told ET.

The Chennai-based company has raised `4,000 crore by selling commercial papers and bonds over the past few weeks in the run-up to become a bank at a much lower 9.5% average cost, which was about 200 basis points lower than its earlier borrowing cost of 11.5-12%.

It has raised loans from cooperative banks as well.

“This (prepaying high-cost debt) is a smart move by the company. Given the data we have, we expect Equitas to boost net interest margin ( NIM) by at least 30-40 bps in the short term till it reduces its lending rates,“ said Sanjeev Jain, senior manager (research) for AUM Capital Market. “Its transition into a small finance bank is expected to be a smooth one as it already has a diversified business model with a strong retail focus,“ he said.

Its NIM was 11.6% for 2015-16 while it earned `167 crore of net profit on consolidated basis. “We look to raise funds continuously via certificate of deposits, bulk deposits and inter-bank participation certificates (IBPC) for funding loan growth,“ Vasudevan said.

Given the fact that most of its Rs 6,500-crore loan is in form of shortterm micro loans to tiny businessmen and loans to small enterprises, classified as priority sector, Equitas could raise a few thousand crore more by selling those loans to banks using IBPC to unlock capital, boost growth and improve profitability .

As a small finance bank, it plans to launch a few loan products -agri loans and old loans -by March 2017.