“We are giving a guidance of 20%+ growth in our credit advances,” said Sarvjit Singh Samra, MD & CEO of the bank. “To support that, our target for deposits is 16%+ growth. Since liquidity is high, we want to further push the CD ratio.”
The bank has seen some pressure on its CASA (current and savings account) ratio, which stood at around 37%, but Samra is optimistic about a recovery. “Yes, there was a lot of pressure on CASA, but I am confident that with interest rate cuts, CASA will improve,” he said. The bank recently reduced its savings deposit rate from 3.5% to 3.35%.
Capital Small Finance Bank has been following a calibrated deposit strategy, especially since it was operating with a low CD ratio. “This was as per our plan, and there is no pressure on growth or anything of that sort,” Samra said. Retail customers make up 92.5% of the deposit base.
The lender has maintained its cost of deposits at 5.9% and overall cost of funds at 6%. Samra said both are likely to fall further this year as rate cuts continue and deposit rates are repriced.
On margins, the bank improved its net interest margin (NIM) from 3.9% in FY24 to 4.2% currently. While acknowledging that rate cuts could put some pressure on NIMs, Samra said the bank is aiming to maintain or even improve the current level.
Other income, which rose 24.5% year-on-year to ₹25.6 crore, was largely fee-based and included bancassurance and partnership revenues. Samra noted that mature branches, those older than five years, are showing more revenue potential, and there’s room to grow further.
Return on equity (RoE), which declined to 10% from 17% two years ago, is expected to recover gradually. “The 17%+ RoE was before we raised capital. Since then, we’ve been gradually consuming that growth capital,” Samra explained. “Our plan is to take RoE back to the level it was before the capital raise.”
He added that the bank would consider raising fresh capital only after RoE returns to pre-raise levels.
Below is the verbatim transcript of the interview.
Q: Some banks have recorded strong deposit growth this quarter. But when we look at your numbers on a quarter-on-quarter basis, there’s a dip. Why is that so?
Samra: We are a bank that was operating with a low CD ratio, which we were deliberately trying to push. So, this was the reason why we had a calibrated deposit growth. Just to give some colour on the deposit book, 92.5% of our deposits are retail, and the CASA share is almost 37%. We have been able to maintain this despite pressures on CASA. This was as per our plan, and there is no pressure on growth or anything of that sort.
Q: What kind of deposit growth are you penciling in for FY26? And if I could club in one more question regarding the CASA ratio, which has also declined sharply, what do you attribute that to, and at what level do you see it stabilising?
Samra: In this financial year, keeping in view the present micro and macro environment, we are giving a guidance of 20%+ growth in our credit advances. Similarly, to support that, our target for deposits is 16%+ growth. Since liquidity is high, we want to further push the CD ratio, which last year also helped improve our net interest margin and return on assets.
On CASA, we are a CASA-driven organisation in the true sense. After converting from a local area bank to a small finance bank, we were paying 3.5% on savings accounts. From May 1 onwards, we have slightly reduced it to 3.35%. We’ve been able to maintain the cost of deposits at 5.9% and the cost of funds at 6%. Yes, there was a lot of pressure on CASA, but I am confident that with interest rate cuts, CASA will improve. Rate cuts have already begun, and we expect more during this financial year, so I see CASA improving going ahead.
Q: I’d also like to ask you about your NIMs. They have contracted sequentially. Now, with the rate cuts you mentioned and with the RBI looking to infuse more liquidity in May to enable rate transmission, what can we expect for your NIMs in FY26? What range are you guiding for?
Samra: First, I’d like to clarify that the NIM at the end of FY24 was 3.9%. In this financial year, we improved it to 4.2%. Now, with the rate cuts, there will definitely be some pressure on the NIM, which we have already factored into our business plan. Our endeavour is to at least maintain it, and we even see the potential to improve it further from the 4.2% level.
Q: What about your bottom line? Other income had a significant contribution in the boost you’ve seen. What is the nature of this other income?
Samra: Other income is a stable income, mostly fee-based. It includes income from partnerships as well, such as bancassurance. After our conversion, we onboarded many new customers. Now, with a decent customer base, especially in mature branches, those that are 5 years old or more, we are seeing greater deepening. There is still legroom to improve this further in the current fiscal and beyond.
Q: One question on your return on equity, which stood at 10%. Two years ago, it was at 17%. What is your outlook for return on equity (RoE) and return on assets (RoA) for FY26 and FY27?
Samra: The 17%+ RoE was before we raised capital. Last year, we had a fresh infusion of ₹450 crore in capital. Since then, we’ve been gradually consuming that growth capital. Our plan is to take RoE back to the level it was before the capital raise. Only after we reach that optimum level will we consider raising capital again. It’s a journey, we’re consuming the capital effectively over time.
Q: Could you tell us your current cost of funds and what you expect going forward?
Samra: The current cost of deposits is 5.9%, and the cost of funds is 6%. With the rate cuts coming in, we have already repriced our savings book, earlier it was 3.5%, now from May 1, it will be 3.35%. We’ve also adjusted our bulk deposit rates. So, I believe both will go down as we move through the next year, and we expect more rate cuts as well.