CARE Ratings revises rating outlook of ESAF Small Finance Bank to to 'stable'
The agency has affirmed the bank's short-term rating at 'CARE A1?.
CARE Ratings stated that the revision reflects material moderation in fresh slippages and asset-quality stress, and the resultant improvement in the bank?s profitability.
After five consecutive quarters of losses (from Q2FY25 to Q2FY26), the bank started reporting profits from Q3FY26 and the profits have been growing quarter-on-quarter.
ESFBL?s performance was adversely affected in FY25 and H1FY26 by stress in the microfinance portfolio, which resulted in elevated credit costs and interest-income reversals.
The bank undertook a significant portfolio clean-up, including the sale of NPAs aggregating Rs 1,019 crore to asset reconstruction companies in FY26. Slippages declined sequentially from Rs 468 crore in Q1FY26 to Rs 75 crore in Q1FY27.
Consequently, gross non-performing assets (GNPA) and net NPA (NNPA) moderated to 5.40% and 0.83%, respectively, as on 30 June 2026 (8.54% and 3.83%, respectively, as on 30 September 2025), while net stressed assets to net worth declined to 11.9% (45.9% as on 30 September 2025).
Moderation in slippages, recovery in margins and improved operating efficiency supported a sequential turnaround in profitability with profit after tax (PAT) improving from a loss of Rs 116 crore in Q2FY26 to profits of Rs 80 crore in Q1FY27.
While return on average total assets (RoTA) increased to 1.04% in Q1 FY27, supported by stronger margins and operating leverage, annualised credit cost remained elevated at 3.1%, partly due to additional provisioning. Sustained profitability remains contingent on further moderation in credit costs.
The operating profile has been strengthened by the significant portfolio rebalancing as the share of microfinance loans/ Unsecured loans declined from 69% of gross advances as on 31 March 2024, to 38% as on June 30, 2026. micro, small and medium enterprise (MSME), agriculture, retail and gold (MARG) portfolio contributed 56% of gross advances, while emerging household loans (includes individual microfinance loans and other loans) accounted for 32% as on 30 June 2026.
Diversification of portfolio should support stability in earnings and in asset-quality in the medium term, although the increasing concentration in gold loans (42% as on June 2026) and the lower yields associated with secured lending could keep margins lower than the historical highs in FY24.
The ratings continue to derive strength from ESFBL?s experienced management and granular retail deposit franchise.
These strengths are partially offset by elevated gearing, moderate current account and savings account (CASA) deposits, geographical and product concentration, and the need to demonstrate sustained profitability and lower credit costs over a longer period.
ESAF Small Finance Bank is a Kerala-based small finance bank (SFB). The bank is currently focused on retail banking business with presence in micro-finance, housing finance, business loans, loan against property (LAP), gold loans and providing financing solutions for marginal customers who lack access to the formal banking and financing channels while providing a comprehensive banking and digital platform for all. The bank received scheduled bank status from RBI on 27 December 2018.
The scrip advanced 1.23% to end at Rs 42.01 on the BSE today.
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