ESAF Small Fin

ESAF Small Finance Bank reported a total loan book of INR 19,161 crores in Q3 FY25, marking a 5.6% YoY increase from INR 18,149 crores in Q3 FY24. Total deposits grew 3.7% QoQ to INR 22,415 crores. However, Net Interest Income (NII) declined to INR 487 crores from INR 597 crores YoY, a decrease of 18.43%, leading to a compressed Net Interest Margin (NIM) of 8.6% compared to 11% in Q3 FY24. The bank recorded a negative Return on Assets (RoA) for the quarter, with pre-provisioning operating profit reducing to INR 127 crores from INR 288 crores YoY.

The bank is actively pursuing a strategic shift towards secured lending, with its secured portfolio reaching 43.35% of the total loan book as of December 31, 2024, a significant increase from 27.91% a year ago. Disbursements in secured loans surged by 172% YoY to INR 4,226 crores in Q3 FY25, now constituting 76% of total disbursements, up from 40% in Q3 FY24. Gold loans specifically grew 22.3% QoQ and 82.1% YoY, while mortgage and MSME lending saw 30.83% QoQ and 83.30% YoY growth. The bank aims to increase its secured portfolio to 45% by March 31, 2025, and 50% by March 31, 2027.

Gross NPA remained stable at 6.9% in Q3 FY25, primarily driven by stress in the microfinance segment, while Net NPA stood at 2.9%. The Provision Coverage Ratio (PCR) improved significantly to 78.6% in Q3 FY25 from 73.7% in Q2 FY25, reflecting proactive provisioning. The bank wrote off INR 450 crores in bad debts this quarter as part of its balance sheet cleanup efforts. Management expects slippages and provisioning impact to come down in future quarters, with a base provisioning of INR 150-160 crores per quarter once NPA normalization occurs.

The liability book demonstrated a 3.71% QoQ deposit growth, reaching INR 22,415 crores in Q3 FY25. Retail deposits continue to form a substantial 92% of total deposits, contributing to a stable funding base. The CASA ratio stood at 24.9% in Q3 FY25, with CASA deposits growing to INR 5,592 crores from INR 3,562 crores YoY. These efforts are aimed at strengthening the bank's liquidity position and optimizing its cost of funds.

The microfinance industry is experiencing a challenging cycle, with stress expected to persist throughout FY25 due to customer indebtedness and lower disbursements. ESAF Small Finance Bank has implemented stricter underwriting standards, capped microfinance loan ticket sizes at INR 75,000, limited loans per client to two, and reduced the borrower exposure limit to INR 1 lakh. Geographically, Kerala showed improvement in slippages, while Tamil Nadu remains a concern, and Karnataka has emerged as a new area of stress in the last 60 days.

The bank has intensified its collection efforts, with digital loan repayment collection increasing by 66% QoQ, from INR 53 crores to INR 142 crores. A dedicated 'war room' has been established to monitor SMAs and NPAs, and proactive forecasting of pre-NPA/SMA-0 accounts is being utilized. Field-level engagement for BC-originated microfinance loans has been enhanced, and group meetings for micro loan borrowers are being revived to reinforce repayment discipline. The overall collection efficiency without NPA stood at 91.47% as of December 31, 2024.

India's GDP growth moderated slightly to a forecast of 6.6% for the current fiscal year in December 2024, down from 7.2%. Consumer inflation eased to 5.22% in December, while the wholesale price index rose to 2.3%. The RBI maintained its monetary policy stance for the 11th consecutive time but reduced the CRR by 50 basis points to 4% and initiated rate cuts, including a 35 bps reduction in repo rates. GST revenues grew 7.3% YoY to INR 1.77 lakh crores in December, indicating robust economic activity.