ESAF Small Finance Bank: Navigating Growth with Strategic Shifts

ESAF Small Finance Bank Limited recently unveiled its performance for Q2 and H1 FY26, showcasing a period of significant strategic recalibration aimed at balancing its core mission of financial inclusion with enhanced profitability and asset quality. The bank reported a Net Interest Income of 364.05 crore for Q2 FY26, contributing to a H1 FY26 Net Interest Income of 741.93 crore. Despite a challenging quarter that saw a Profit After Tax of (115.81) crore for Q2 FY26 and (197.03) crore for H1 FY26, the management articulated a clear path forward, emphasizing a strategic shift towards a more resilient and diversified business model.

The bank's operational highlights reveal a deliberate pivot towards secured lending. Gross Advances grew by 4.3% year-on-year and 5.0% quarter-on-quarter, reaching 19,137 crore. A notable achievement is the increase in secured loans to 61% of gross advances, a significant jump from 39% a year ago, achieved ahead of the bank's March 2027 target. This shift has been primarily fueled by robust growth in retail advances, particularly gold loans, which have more than doubled compared to the previous year. Total disbursements for H1 FY26 stood at 16,607 crore, more than double the disbursements in Q2 FY25, with secured loans accounting for over 75% of total disbursements in the last four quarters. This strategic reorientation is expected to strengthen asset quality, reduce portfolio concentration, and de-risk the business model.

Strategic Pillars and Operational Excellence

ESAF SFB's strategy is built on several key pillars, including increasing deposits, expanding advances, deeper market penetration, enhancing fee income, leveraging technology, and focusing on recovery. The bank's deposit base remained robust, with total deposits at 22,894 crore as of September 30, 2025, reflecting a 5.9% year-on-year growth. CASA balances were a key highlight, growing by 13.7% year-on-year to 6,046 crore, with the CASA ratio improving to 26.4%. The retail share of deposits further strengthened to 96%, underscoring the quality and stickiness of its franchise. Management indicated that moderated deposit rates would contribute to reducing the cost of funds in the coming quarters.

Asset quality, while still a focus area, showed signs of stabilization. Gross NPA marginally increased to 8.5%, but Net NPA remained stable at 3.8%. The provision coverage ratio improved to 74.4%, demonstrating the bank's commitment to strengthening its balance sheet. Slippages moderated to 340 crore in Q2, down from approximately 450 crore in the preceding two quarters, driven by improved trends in the micro banking segment. The bank is actively implementing enhanced monitoring, proactive collection strategies, and service management to bring down NPAs to sustainable levels.

Technology and Future Outlook

Technology remains a cornerstone of ESAF SFB's operational strategy. The bank has implemented a technology-driven model with digital platforms for banking transactions, a digitalized central credit processing unit for micro loans, and a 24/7 vernacular support call center. Initiatives like cashless disbursements, reduced turnaround times for account opening and loan underwriting using tablets, and E-sign for micro loan disbursals highlight its commitment to improving customer experience and operational efficiency. These efforts have also contributed to environmental benefits, such as significant paper reduction.

Looking ahead, management expressed confidence in achieving positive quarterly ROA in FY26, if not by Q3, then definitely by Q4. They project a cost-to-income ratio of 60-65% and aim for an ROA of 2% and ROE of 20% by FY27, with annual book growth expected to be 20-25%. The bank's appointment of Shri Karthikeyan M as its part-time Chairman, a veteran commercial banker, is expected to further strengthen its board and strategic direction. ESAF SFB's journey reflects a determined effort to navigate market complexities through strategic shifts, technological adoption, and a steadfast commitment to its social mission, positioning itself for sustainable growth in the evolving Indian banking landscape.

Commitment to Sustainability and Governance

ESAF SFB's dedication to social responsibility and ethical governance is evident through its ISO 26000:2010 certification, recognizing its inclusive financial services and environmental resilience. The bank's triple bottom line approach focuses on People (financial inclusion, gender equality), Planet (environmental protection, sustainable development), and Prosperity (governance, accountability, transparency). Initiatives like the ESAF Bank Environment Week 2025, which included planting saplings and promoting water conservation, underscore its commitment to ESG principles. The bank's ESG score of 68.1/100, as rated by CareEdge ESG Ratings, further validates its strong performance in environmental, social, and governance aspects, reinforcing investor confidence in its long-term sustainability.