Detailed Narrative
Strategic Shift Towards Secured Lending and Diversified Growth
ESAF Small Finance Bank is undergoing a significant strategic shift, with secured assets now constituting 61% of gross advances in Q2 FY26, a substantial increase from 39% a year ago. This transition, initially targeted for March 2027, has been achieved ahead of schedule. The bank's disbursements grew robustly by 119% YoY and 16% QoQ, primarily driven by strong traction in gold loans, MSME, agri, and affordable housing, with gold loans alone contributing approximately INR 6,500 crores in Q2 disbursements.
Robust Deposit Franchise and CASA Growth
The bank demonstrated strength in its deposit franchise, with total deposits growing 6% YoY to INR 22,894 crores as of September 30, 2025. Retail deposits showed even stronger growth, rising 11% YoY to INR 22,082 crores, now accounting for 96% of total deposits, up from 93% in FY25. CASA balances increased 14% YoY to INR 6,046 crores, leading to a 180 basis points improvement in the CASA ratio to 26.4%, reflecting a stable and granular funding base.
Asset Quality Trends and Risk Management
While Gross NPA marginally increased to 8.5% in Q2 FY26, Net NPA remained stable at 3.8%, and the Provision Coverage Ratio improved to 74.4%. Slippages moderated significantly to INR 340 crores in Q2, down from INR 450 crores in the preceding two quarters, indicating improved trends in micro banking. The bank is focusing on disciplined underwriting and risk management, particularly in microfinance, where new disbursements since June 2024 show a slippage rate of approximately 2%.
NIM Compression and Operational Efficiency Initiatives
Net Interest Income (NII) for Q2 FY26 was INR 364 crores, a sequential decline from INR 378 crores in Q1 FY26, with Net Interest Margin (NIM) stable at 5.9%. The NIM compression is attributed to the shift towards lower-yielding secured assets and the impact of repo rate changes. Management is actively working to curtail operating expenses and aims to improve the cost-to-income ratio to 60-65% in the future, alongside increasing yields on retail books, including gold loans (currently 13.4% average yield).
Outlook and Future Targets
ESAF Small Finance Bank aims to achieve positive quarterly ROA by Q3 or Q4 FY26. For FY27, the bank targets an ROA of 2% and an ROE of 20%, with a book growth of 20-25% YoY. The share of unsecured business is expected to moderate from 35% in the current year to around 30% in FY27. The bank also anticipates credit cost to be around 4% on a steady-state basis, reflecting improved asset quality and risk management.