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    ESAF Small Fin

    ESAFSFB
    Financial Services·12 Nov 2025
    Management Summary

    ESAF Small Finance Bank reported a quarter of strategic transition in Q2 FY26, with strong growth in deposits and disbursements, particularly in secured segments like gold loans. While asset quality saw a marginal increase in GNPA, slippages moderated, and the bank remains focused on improving profitability and operational efficiency, targeting positive ROA by Q3 or Q4 FY26.

    Highlights

    6
    • Total business grew 5% YoY to INR 42,031 crores, with advances up 4% and deposits up 6%.

    • Retail deposits increased 11% YoY to INR 22,082 crores, improving their share to 96% of total deposits.

    • CASA balances grew 14% YoY to INR 6,046 crores, with the CASA ratio improving by 180 bps to 26.4%.

    • Disbursements grew 119% YoY and 16% QoQ, primarily led by gold, MSME, agri, and affordable housing.

    • Secured assets now form 61% of gross advances, up from 39% a year ago, aligning with de-risking strategy.

    • Slippages moderated to INR 340 crores in Q2, down from INR 450 crores in the previous two quarters.

    Concerns

    3
    • Gross NPA marginally increased to 8.5% in Q2 FY26, though Net NPA remained stable at 3.8%.

    • Net Interest Income (NII) for Q2 FY26 was INR 364 crores, a sequential decline from INR 378 crores in Q1 FY26.

    • Pre-provisioning operating profit (after treasury & PSLC sales) decreased to INR 93 crores in Q2 FY26 from INR 125 crores in Q1 FY26.

    What Changed2

    vs Q3 FY26

    Guidance items6 → 10 (+4)Risks discussed1 → 4 (+3)

    Key financials

    Single quarter

    09 metrics
    1. 01Total Business₹42,031 Cr+5%YoY
    2. 02Total Deposits₹22,894 Cr+6%YoY
    3. 03Gross Advances₹19,137 Cr+4%YoY
    4. 04CASA Ratio26.4%
    5. 05Net Interest Income₹364 Cr-3.7%QoQ

    Guidance & targets

    10
    CategoryTargetPriority
    Profitability
    Quarterly ROA
    Positive
    High
    Profitability
    ROA
    2%
    Medium
    Profitability
    ROE
    20%
    Medium
    Portfolio Mix
    Secured Portfolio Share
    70%
    High
    Portfolio Mix
    Unsecured Portfolio Share
    35%
    High
    Portfolio Mix
    Gold Loans Share
    ~40%
    Medium
    Portfolio Mix
    Unsecured Business Share
    30%
    High
    Credit Growth
    Book Growth
    20-25%
    High
    Operational Efficiency
    Cost-to-Income Ratio
    60-65%
    Medium
    Asset Quality
    Credit Cost
    4%
    Medium

    Achieving positive quarterly ROA

    Q3 or Q4 FY26
    CurrentNot explicitly stated as positive in Q2, but targeted
    TargetPositive ROA

    Why it matters

    A key indicator of the bank's overall profitability and financial health.

    We are working towards attaining it in Q3, if not in Q3, than definitely in Q4.

    How to verify

    guidance_and_targets[metric='Quarterly ROA']

    Risks & concerns

    4
    RiskSeverity

    Microfinance portfolio stress

    After 4-5 quarters of stress, early signs of normalization are visible, with renewed focus on credit discipline and improved collection efficiencies.Management acknowledged

    medium

    NIM compression due to portfolio mix shift

    Shift towards secured lending and repo rate changes led to NIM contraction, but efforts are underway to improve it.Management acknowledged

    medium

    Marginal increase in Gross NPA

    Gross NPA marginally increased to 8.5%, but Net NPA remained stable at 3.8%, with improved PCR at 74.4%.Management acknowledged

    medium

    Regional concentration in stressed microfinance book (Tamil Nadu & Karnataka)

    Tamil Nadu and Karnataka have been the biggest stressed states, but control over the portfolio has improved, and progress is expected.Management acknowledged

    medium

    Q&A highlights

    8

    “Yes. As of September end, secured loan is 61% and micro loan percentage has come down to 39%. We had planned to achieve this in 2027, but we were able to achieve this very early.”

    Clarifies the current portfolio mix and the accelerated achievement of the strategic goal to increase secured lending, indicating a de-risking strategy.

    asked by Varun Mishra

    2 min read5 chapters

    Detailed Narrative

    01

    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.

    02

    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.

    03

    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%.

    04

    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).

    05

    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.

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