Equitas Small Finance Bank Ltd Management Discussions

Global Economy

The global economy entered 2026 at an inflection point, balancing moderating inflation and easing monetary conditions against rising geopolitical risks and structural shifts in trade, investment and industrial policy. Global GDP growth remained relatively stable at 3.4% in 2025, supported by strong public and private investment, technology-led capital expenditure, and lower energy prices during much of the year. However, growth trends remained uneven across regions, reflecting differences in fiscal priorities, policy responses and domestic demand conditions.

Real GDP Growth (%)
World Output
2027 (P)	3.2
2026 (P)	3.1
2025	3.4

Advanced Economies
2027 (P)	1.7
2026 (P)	1.8
2025	1.9

Emerging Market and Developing Economies
2027 (P)	4.2
2026 (P)	3.9
2025	4.4

Advanced economies expanded by 1.9% in 2025, supported by fiscal spending, infrastructure investments and industrial policies focused on strengthening domestic manufacturing, energy security and technological competitiveness. Growth in the United States moderated to 2.1%, while Emerging Market and Developing Economies (EMDEs) continued to drive global growth, expanding by 4.4%, led by China at 5.0%.

National fiscal policies remained a key growth driver during the year, with governments across major economies independently increasing investments in infrastructure, energy transition, semiconductors, digital technologies and strategic industries. These measures supported economic activity while reshaping global trade and investment flows.

Global inflation moderated to 4.1% in 2025, aided by easing supply chain constraints and softer commodity prices. However, inflationary pressures persisted across several economies, prompting central banks to adopt a cautious and data-driven approach towards monetary easing. Although some advanced economies initiated rate cuts, financial conditions remained relatively tight, with borrowing costs staying above pre-pandemic levels.

Global Inflation (%)
2027 (P)	3.7
2026 (P)	4.4
2025	4.1

Technology-led investments emerged as a defining theme of the year, with significant capital directed towards artificial intelligence, cloud infrastructure, semiconductors and data centres. At the same time, geopolitical developments and supply-chain diversification strategies continued to influence global trade patterns and investment decisions.

Escalating tensions in the Middle East during the start of 2026, renewed concerns around energy security and inflation, with Brent crude prices rising from around US$ 70 per barrel towards US$ 100 per barrel. Against this backdrop, the IMF projects global growth to moderate to 3.1% in 2026 before improving marginally to 3.2% in 2027, with the outlook remaining sensitive to geopolitical developments, energy markets and the trajectory of monetary policy.

Equitas Small Finance Bank

Indian Economy

India sustained its position as one of the worlds fastest-growing major economies in 2025-26, with real GDP estimated to have grown by 77%. This strong momentum reflects a structural unification of robust domestic fundamentals, sustained policy support, and broad-based sectoral performance.

Real GDP Growth Trajectory (in %)
2025-26 (Provisional Estimates)	7.7%
2024-25 (First Revised Estimates)	7.1%
2023-24	7.2%

Notwithstanding global headwinds, the domestic economy remained highly resilient. The year was marked by strong production momentum and stable retail inflation with headline CPI well- controlled at 3.4% in March 2026 and 3.5% in April 2026, supported by improving labour market indicators and robust external and financial buffers.

However, external risks are intensifying. Disruptions in the Strait of Hormuz in early 2026 have triggered upward pressure on crude oil prices and strained energy supply chains. Simultaneously, the potential escalation of maritime threats in the Red Sea could further amplify supply-side shocks and heighten volatility across global trade routes. These developments pose localised downside risks that extend beyond current market expectations.

In this volatile context, the efficacy of Indias coordinated fiscal, monetary, and structural policies has fortified macroeconomic stability. S&P upgraded Indias long-term sovereign credit rating to BBB from BBB- during the year, marking the countrys first sovereign upgrade by S&P in 18 years.

Complementing this, the rollout of GST 2.0 brought comprehensive tax reforms that reaffirm economic resilience amid a shifting U.S. tariff overhang. These structural measures position the country to absorb external shocks while sustaining investment, consumption, and inclusive development on its trajectory towards evolving into a prosperous upper middle-income economy by 2047, the centenary of its independence.

Pro-Growth Monetary Policy Stance

Responding to easing inflation and prevailing monetary conditions, the Reserve Bank of India (RBI) initiated a structural monetary easing cycle, signalling long-term confidence in the domestic financial system:

(Source: Press Information Bureau (January 30, 2026), The Economic Times (June 06, 2025))

Repo Rate Cuts

The RBI initiated its first rate cut in five years on February 7, 2025, and subseguently lowered the repo rate in a series of cuts totalling 125 basis points, bringing it down from 6.50% to 5.25% to shift towards a growth-supportive stance.

Cash Reserve Ratio (CRR) Easing

The RBI reduced the Cash Reserve Ratio (CRR) from 4.0% to 3.0%. The reduction was implemented in four egual tranches of 25 basis points each, commencing in September 2025, thereby enhancing durable liguidity in the banking system.

Sectoral Performance

Indias growth engine continues to be led by the Services sector, which accounts for over 53% of GDP. Momentum was driven by sustained expansion in information technology, financial services, and digital platforms, further amplified by the Enhanced Access and Service Excellence (EASE) reforms framework and rising digital penetration across semi-urban and rural geographies. Concurrently, the Industrial sector maintained steady growth through higher capital goods investments and structural traction from Production-Linked Incentive (PLI) schemes across 14 sectors. The Union Budget 2026-27 reinforced this industrial momentum, prioritising domestic manufacturing and infrastructure creation as vital multi-year drivers to enhance national productivity and absorb global supply chain realignments.

In the primary economy, Agriculture and Allied Activities remain a vital cornerstone of socio-economic stability, generating one-fifth of national income and employing nearly 46% of the workforce. The sector is undergoing a structural shift as allied segments like livestock, fisheries, and horticulture increasingly drive growth beyond traditional crop-based farming. Supported by a substantial central budget allocation of 1.63 lakh Crore, the Union Budget 2026-27 prioritised technology-led rural resilience. This is highlighted by the launch of the multilingual, AI-enabled Bharat-VISTAAR platform which integrates AgriStack portals to deliver real-time, customised advisory to farmers, alongside targeted credit interventions to modernise high-value crop and livestock value chains.

(Source: Press Information Bureau - Economic Survey (January 30, 2026); Press Information Bureau (March 10, 2026); EY - Agriculture sector Highlights - Union Budget 2026; Press Information Bureau (February 13, 2026); Press Information Bureau (February 14, 2026))

Consumption and Banking Demand Dynamics

A major pillar of Indias growth resilience has been robust domestic consumption. While urban consumption remained healthy, rural demand showed signs of a structural recovery through 2025-26. This turnaround was validated by a decline in MGNREGA employment demand (a reliable counter-cyclical indicator) alongside a visible volume pickup in FMCG, two-wheelers, and agri-inputs.

Small business owners engaged in daily-use products and services such as provision stores, eateries, salons, and local transport operators, possess highly localised, essential service models. These micro-entrepreneurs have consistently demonstrated the agility to adjust their end prices in line with inflationary pressures, thereby successfully preserving their cash flows and repayment capacities through changing economic cycles.

External Sector

Indias external sector demonstrated remarkable stability despite persistent geopolitical conflicts and trade frictions.

Driven by healthy export traction, combined merchandise and services exports reached an all-time high of US$ 863.11 billion in 2025-26, marking a 4.59% increase over the US$ 825.26 billion recorded in 2024-25.

Supported by this export momentum, foreign exchange reserves rose to US$ 681.38 billion as of the week ending May 22, 2026 (up from US$ 645.58 billion at the (Source: Press Information Bureau (April 15, 2026);

RBI Weekly Statistical Supplement - Extract (May 29, 2026)) close of 2024-25). This structural buffer provides extensive import coverage and insulates domestic financial liquidity from sudden global market shifts. Additionally, India continues to lead globally in inward remittance receipts, further strengthening the current account.

Digital Economy and Financial Inclusion

Indias digital transformation expanded at nearly twice the pace of overall GDP during 2025-26, putting the digital economy on track to account for 20% of national income by 2029-30. Key payment and data rails have rewritten banking distribution physics:

- Transaction Velocity: UPI transactions hit new historic peaks, reflecting deep behavioural adoption across both urban and rural merchants

- Financial Ecosystem Infrastructure: The Account Aggregator (AA) framework and the JAM (Jan Dhan-Aadhaar-Mobile) are collectively formalising cash flows; the AA framework, now fully scaled across scheduled commercial banks, has unlocked data-driven, paperless underwriting for segment populations traditionally lacking conventional credit track records

(Source: Ministry of Electronics & IT - PIB (January 28, 2025); Department of Financial Services (March 31, 2026))

The MSME Sector: Addressing the Structural Credit Gap

The MSME sector continues to be a key driver of Indias economic growth, supported by increasing formalisation and expanding access to institutional credit. According to the MSME Pulse Report (December 2025), consolidated MSME credit outstanding reached approximately 67.6 lakh Crore, reflecting 16% year-on-year growth, while serious delinquencies declined to a five-year low of 1.87%.

Despite steady progress, significant opportunities remain, with formal credit penetration among Udyam-registered MSMEs at approximately 47%, underscoring the sectors substantial untapped financing potential.

(Source: SIDBI - MSME Pulse Report (Dec 2025))

Outlook

For 2026-27, Indias real GDP growth is projected to moderate to around 6.5%. While domestic macrostability remains supported by resilient private consumption and robust capex, close risk vigilance is required regarding elevated landed costs for crude imports driven by West Asian geopolitical tensions, as well as potential agricultural slowdowns from El Nino-induced weak monsoon conditions.

(Source: The Economic Times (June 07, 2026))

Indian Banking Sector

2025-26 marked a transition from balance-sheet repair to growth. Supported by healthier balance sheets, stronger capitalisation, and improved asset quality, banks were well positioned to support Indias expanding economy. Scheduled Commercial Banks recorded credit growth of approximately 15.9-16.0% during the year, driven by demand across retail, MSME, agriculture, services, and infrastructure-linked sectors. Deposit growth remained relatively slower at approximately 13.4%, resulting in continued focus across the industry on strengthening liability franchises and mobilising stable, granular deposits. Continued formalisation of the economy, infrastructure investments, digital adoption, and government-led financial inclusion initiatives further broadened access to formal finance and strengthened credit penetration across the country.

Key Enablers

- Infrastructure and manufacturing investments

- Financial inclusion initiatives such as PMJDY, PMMY and PM SVANidhi

- MSME formalisation and credit access

- Expanding retail and services sector demand

Deposits Emerge as the Sectors Key Strategic Focus

While lending activity remained robust, deposit growth lagged credit expansion, making liability mobilisation one of the defining themes of the year. Elevated credit-to-deposit ratios intensified competition for deposits and increased the importance of maintaining a stable and granular liability base. A shift towards higher-yielding term deposits also increased funding costs, creating pressure on margins across the sector.

Key Trends

Deposit growth of ~10-11% Credit-to-deposit ratio of ~81.75%

Rising competition for retail deposits

Increasing focus on liability franchise strength

Regulation, Technology and Efficiency Shape the Next Phase

As the sector strengthened, regulatory priorities shifted towards enabling sustainable growth while maintaining financial stability.

The RBI rolled back enhanced risk weights on certain NBFC and unsecured retail exposures and deferred revised LCR guidelines, supporting liquidity and credit sentiment. Simultaneously, oversight of consumer credit, governance standards, cybersecurity and operational resilience remained a priority.

STATUTORY REPORTS

Strong Fundamentals Underpin Sector Resilience

The banking sector continued to strengthen its financial position during 2025-26. Gross NPAs declined to around 2.3%, while Net NPAs remained near 0.5%, reflecting stronger underwriting standards, improved recoveries and disciplined risk management. Capitalisation also remained robust, with the banking system maintaining a CRAR of ~172%.

Importantly, sectoral risks have become more diversified. Large corporate stress has largely subsided, with vulnerabilities now concentrated in select unsecured retail, MSME and microfinance segments. RBI stress tests continued to indicate that banks remain well positioned to absorb adverse shocks.

Key Indicators

GNPA: ~2.3%

NNPA: ~0.5%

- CRAR: ~172%

- Strong provisioning buffers and solvency position

The operating model of banking also continued to evolve. Digital public infrastructure, including Aadhaar,

UPI and the Account Aggregator framework, accelerated customer acquisition, transaction efficiency and credit delivery.

Key Developments

- Regulatory easing for select credit segments

- Continued focus on governance and risk management

- Expansion of digital banking and payments ecosystems

- Greater emphasis on productivity and operating efficiency

Outlook

The Indian banking sector enters 2026-27 from a position of strength. Continued infrastructure development, increasing financialisaton, expanding digital adoption and supportive government initiatives are expected to sustain credit demand. While deposit mobilisation, funding costs and pockets of stress in unsecured retail and microfinance portfolios warrant monitoring, the sector remains well positioned to support Indias next phase of economic growth.

Resolution of the Microfinance Stress Cycle

Small Finance Banks

2025-26 marked a defining year for Indias Small Finance Banks (SFBs) sector as institutions navigated the aftermath of a severe microfinance stress cycle while simultaneously repositioning their business models for long-term sustainability. The year was characterised by elevated credit costs, asset guality pressures and profitability challenges in the first half, followed by a gradual recovery supported by borrower deleveraging, improving collection efficiencies and stronger underwriting discipline. More fundamentally, the sector continued its transition from a predominantly financial inclusion-focused model towards a more diversified and risk-calibrated banking framework, combining grassroots outreach with increasingly sophisticated lending, liability mobilisation and digital capabilities. This evolution is reinforcing the role of SFBs as important intermediaries serving micro-enterprises, emerging entrepreneurs and underserved households across semi-urban and rural India.

The sectors primary challenge stemmed from the overleveraging of microfinance borrowers following the rapid post-pandemic credit expansion. The implementation of MFIN Guardrail 2.0 emerged as a significant corrective measure, introducing stricter borrower-level controls, including limits on the number of lenders per borrower, aggregate indebtedness thresholds and restrictions on lending to customers with existing overdue obligations. These measures accelerated deleveraging across the sector, with the industry-wide microfinance portfolio declining from approximately 4.34 lakh Crore in March 2024 to 3.75 lakh Crore in March 2025, and further moderating to around 3.38 lakh Crore by March 2026, reflecting tighter underwriting standards, lower borrower leverage, and a renewed focus on portfolio quality across lenders. The reduction in borrower overleveraging, combined with tighter underwriting standards, helped lower systemic risk and improve portfolio quality across the ecosystem.

Collection efficiencies improved progressively through the year, while portfolios originated under the revised framework demonstrated materially stronger repayment behaviour, indicating that stress remained largely concentrated within legacy portfolios.

(Source: MFIN Micro Matters - Macro View 2024-25; CARE Ratings Microfinance Industry Report https://mfinindia.org/assets/upload_image/publications/Studies/MFIN%20Micro%20Matter%20 -%20Macro%20View%20 2024-25.pdf

https://www.careratings.com/uploads/newsfiles/1760347854_NBFC-%20Microfinance%20 Industry%20-%20CareEdge%20Report.pdf)

Strategic Shift towards Secured Lending

The stress cycle accelerated a structural transformation across the SFB landscape. Historically, microfinance served as the primary growth engine for many institutions; however, successive disruptions, including demonetisation, the COVID-19 pandemic and the recent overleveraging cycle, have increased the normalised credit cost profile of the segment. As a result, SFBs are increasingly rebalancing their portfolios towards secured and granular retail asset classes that offer more stable risk-adjusted returns.

(Source: Business Standard (CRISIL Ratings); Economic Times

https://www.business-standard.com/industry/banking/small-finance-banks-advances-

growth-crisil-ratings-rs-2-trillion-fy26-125102801190_1.html

https://rn.economictimes.com/markets/stocks/news/after-asset-guality-hit-small-finance-

banks-to-sharpen-risk-controls-for-2026/articleshow/126473364.cms)

Key growth segments include:

- Affordable housing finance

- MSME and small business lending

- Vehicle finance

- Loan against property (LAP)

- Gold loans and secured retail products

This diversification is reducing concentration risks, strengthening portfolio resilience and creating a more balanced growth framework for the sector. Sector advances are expected to continue expanding, with growth increasingly supported by nonmicrofinance segments.

Regulatory Support and Sector Evolution

The regulatory environment remained supportive of the SFB sectors evolution. During the year, the RBI reduced the Priority Sector Lending (PSL) requirement for SFBs from 75% to 60% of ANBC/CEOBE, providing greater flexibility in capital allocation while preserving the sectors financial inclusion mandate. Additionally, the RBIs in-principle approval for the conversion of an SFB into a Universal Bank highlighted the sectors growing maturity and long-term potential.

(Source: Business Standard; Economic Times

https://www.business-standard.com/industry/banking/small-finance-banks-advances-growth-crisil-ratings-rs-2-trillion-fy26-125102801190_1.html

https://bfsi.economictimes.indiatimes.com/news/banking/growth-of-small-finance-banks-in-india-projected-to-reach-20-23-pc-in-fy26/117229768)

STATUTORY REPORTS

Strengthening Liability Franchises and Distribution Reach

Despite industry-wide competition for deposits and elevated funding costs, the sector remains well- capitalised, with capital buffers comfortably above regulatory requirements. Retail deposit mobilisation, CASA growth and granular funding strategies continue to support funding stability and sustainable balance sheet expansion. A credit-deposit ratio of approximately 89%, comparable to private sector banks, reflects healthy credit demand and efficient deployment of capital.

Geographic expansion has also remained a key growth driver. Between March 2019 and March 2025, the SFB branch network more than doubled to approximately 7,641 branches. More than half of these outlets are located in rural and semi-urban markets, strengthening financial inclusion while enhancing distribution reach, customer acquisition and geographic diversification.

(Source: CARE Ratings; Economic Times

https://www.careratings.com/uploads/newsfiles/1760098150_Small%20Finance%20Banks%20Navigating%20Growth%20Amid%20Microfinance%20Challenges.pdf

https://bfsi.economictimes.indiatimes.com/news/banking/growth-of-small-finance-banks-in-india-projected-to-reach-20-23-pc-in-fy26/117229768)

Digital Transformation and Financial Inclusion

Technology has emerged as a key differentiator within the Small Finance Bank (SFB) ecosystem, enabling scalable growth while advancing financial inclusion.

SFBs are increasingly leveraging integrated phygital models, data analytics, automation, AI and ML to enhance customer onboarding, credit assessment, risk monitoring and operational efficiency. Supported by Indias robust digital public infrastructure, including high UPI transaction success rates and growing internet penetration, digital financial services are helping banks expand reach, improve customer acquisition and lower servicing costs, particularly in underserved geographies. At the same time, government-led initiatives such as the Jan Dhan-Aadhaar-Mobile (JAM) Trinity, Pradhan Mantri Jan Dhan Yojana (PMJDY), Pradhan Mantri Mudra Yojana (PMMY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Atal Pension Yojana (APY) continue to deepen financial inclusion by expanding access to banking, credit, insurance and pension products for unbanked and underbanked populations.

(Source: CARE Ratings; The Hindu;

Government Financial Inclusion Initiatives

https://www.careratings.com/uploads/ newsfiles/1760098150_Small%20Finance%20 Banks%20Navigating%20Growth%20Amid%20 Microfinance%20Challenges.pdf

https://www.thehindu.com/sci-tech/ technology/india-now-has-958-million-active-internet-users-57-of-these-are-from-rural-areas/article70566646.ece)

Outlook

The outlook for the SFB sector remains constructive despite nearterm challenges in the microfinance segment. 2025-26 marked a period of stabilisation and strategic recalibration, with institutions actively diversifying their portfolios away from unsecured microfinance lending towards secured retail assets such as affordable housing finance, MSME lending, vehicle finance and other granular retail segments. This shift is expected to support more resilient growth, improved asset quality and lower earnings volatility over the medium term.

Sector credit growth is projected to remain healthy at approximately 20-23%, supported by stronger risk controls, improving collection efficiencies, moderating borrower leverage and continued expansion of secured lending portfolios. The implementation of revised Priority Sector Lending (PSL) norms, which reduced the mandatory PSL requirement for SFBs from 75% to 60% of Adjusted Net Bank Credit, has provided additional flexibility to rebalance portfolios and pursue lower-risk growth opportunities.

While profitability may remain moderated in the near term due to margin pressures and elevated funding costs, the sector continues to benefit from strong capitalisation, robust deposit growth and increasing digital adoption. As SFBs strengthen their liability franchises, deepen rural penetration and leverage technology-led operating models, they are evolving into diversified, deposit-led financial institutions capable of sustainably bridging grassroots credit demand with the formal banking system while advancing Indias long-term financial inclusion agenda.

(Source: Economic Times BFSI; CARE Ratings; CRISIL Ratings

https://bfsi.economictimes.indiatimes.com/news/banking/growth-of-small-finance-banks-in-india-projected-to-reach-20-23-pc-in-fy26/117229768

https://www.careratings.com/uploads/newsfiles/1760098150_Small%20Finance%20Banks%20Navigating%20Growth%20Amid%20Microfinance%20Challenges.pdf

https://www.business-standard.com/industry/banking/small-finance-banks-advances-growth-crisil-ratings-rs-2-trillion-fy26-125102801190_1.html)