Detailed Narrative
Q3 FY26 Performance Turnaround and Profitability
ESAF Small Finance Bank reported a significant turnaround in Q3 FY26, with Profit After Tax (PAT) turning positive at ₹7 crores. This was supported by a robust 171% sequential and 98% year-on-year increase in pre-provisioning operating profit, reaching ₹253 crores. The bank's Net Interest Income (NII) also grew to ₹432 crores, marking a 16.13% quarter-on-quarter increase, reflecting improved operational efficiency and business growth.
Significant Asset Quality Improvement
The bank demonstrated clear progress in enhancing asset quality during Q3 FY26. Gross Non-Performing Assets (GNPA) declined to 5.6%, and Net Non-Performing Assets (NNPA) reduced to 2.7%. Slippages saw a sharp reduction to ₹219 crores from ₹505 crores in Q3 FY25. This improvement is attributed to stable microfinance performance, disciplined credit underwriting, and the increasing contribution from secured lending segments.
Strategic Shift to Secured Lending (MARG Strategy)
ESAF SFB's 'MARG' strategy, focusing on MSME, Agri, Retail, and Gold loans, has been pivotal in reshaping its portfolio. Secured assets now constitute 63% of gross advances, a significant increase from 45% a year ago, with a target to reach 70% by March 2027. This strategic shift has led to a 24% year-on-year decline in the unsecured portfolio, reducing its share to 37% from 55% last year, thereby enhancing portfolio resilience and reducing volatility.
Robust Growth in Advances and Deposits
As of December 31, 2025, the bank's total business stood at ₹44,686 crores, registering a 10% year-on-year growth. Gross advances grew 13% year-on-year to ₹20,679 crores. Disbursements showed strong momentum, increasing 134% year-on-year and 46% quarter-on-quarter, with secured lending comprising 81% of new disbursements. Total deposits reached ₹24,006 crores, growing 7% YoY, with retail deposits contributing 93% and CASA balances growing 8% YoY to ₹6,030 crores, improving the CASA ratio to 25.1%.
Net Interest Margin Expansion and Cost of Funds Management
Despite a higher share of secured lending and a 25 basis points reduction in the repo rate during Q3, the Net Interest Margin (NIM) improved significantly to 6.6% from 5.9% in the previous quarter. This expansion was driven by the benefits of a lower cost of funds and improved fund deployment in the loan book, which effectively outweighed any marginal yield compression.
Future Outlook and Profitability Targets
Management anticipates credit costs to normalize to a range of 2-3% by Q1 FY27. They project loan growth of approximately 15-16% for FY26 and a more aggressive 25% for FY27. The bank aims for a steady-state Return on Assets (ROA) of 1.5-2%, with the full impact of these improvements expected by FY28, as it continues its strategic initiatives and digital transformation efforts like 'ESAF 2.0 StratoNeXt'.
Stabilization of Microfinance Portfolio
After experiencing industry-wide stress for nearly five quarters, the microfinance portfolio is now showing clear signs of stabilization. Collection efficiencies have improved sequentially, and the overall operating environment is normalizing. The bank is leveraging this through a focused strategy that includes revamping 'Sangam' meeting processes, targeted acquisition of quality customers, and structured graduation from group loans to individual loans, while maintaining disciplined underwriting.