ESAF Small Fin

ESAF Small Finance Bank reported a total business of INR42,507 crores as of June 30, 2025, reflecting a 4.82% YoY growth, with underlying growth at 8.74% after adjusting for technical write-offs and NPA sales. Deposits grew 8.7% YoY to INR22,698 crores, while gross advances stood at INR18,224 crores. Disbursements surged 71% YoY to INR7,694 crores, with 90% comprising secured loans, aligning with the bank's de-risking strategy.

The bank's asset quality saw Gross NPA at 7.5% and Net NPA at 3.8% for FY26, primarily driven by the micro banking book in Karnataka and Tamil Nadu. However, management noted moderating SMA levels and an improved Provision Coverage Ratio of 73.2%. The bank executed NPA sales and technical write-offs totaling INR733.4 crores, resulting in a net P&L benefit of INR45.76 crores and a reduction in gross NPA.

ESAF SFB is strategically shifting its loan book towards secured assets, which now account for 54.79% of the total loan book, up significantly from 32.69% a year ago. Gold loans were a standout performer, growing 16% QoQ and more than doubling YoY. The micro loan book, however, declined from INR13,236 crores in Q1 FY25 to INR9,095 crores in Q1 FY26 as part of the de-risking strategy.

The bank demonstrated strong deposit franchise growth, with total deposits reaching INR22,698 crores, an 8.7% YoY increase. Retail deposits grew 13.17% YoY to INR21,763 crores, now constituting 96% of total deposits, up from 93% in FY25. CASA balances also showed robust growth of 14% YoY, reaching INR5,628 crores, supported by branch network expansion in semi-urban and rural areas, competitive pricing, and enhanced product offerings.

Net Interest Income (NII) for Q1 FY26 was INR378 crores, a notable decrease from INR588 crores in Q1 FY25. Consequently, Net Interest Margin (NIM) moderated to 6% from 9.4% in the prior year. This compression was attributed to the strategic shift towards lower-yielding secured assets, the impact of RBI rate cuts on the gold loan book, and the cost of carrying excess liquidity, which stood at INR2,000 crores.

The bank maintains a strong Capital Adequacy Ratio (CAR) of 22.7% and a Tier 1 CAR of 18.4%. To further strengthen its CRAR position, ESAF SFB raised INR65 crores through Tier 2 bonds with a 6-year maturity in July 2025. Management indicated aggressive plans for increasing the asset book, which would require capital, but no concrete decisions on fresh equity raising have been taken yet.

Acknowledging the stress in the microfinance segment, ESAF SFB has fully implemented MFIN Guardrails 2.0, focusing on stricter lending norms such as limiting loans to INR2 lakhs per individual and a maximum of three outstanding loans. The bank is also directly managing its microfinance portfolio and intervening in BC-run portfolios to improve quality, particularly in Karnataka, which had shown stress.