ESAF Small Finance Bank

CareEdge Ratings downgraded ESAF Small Finance Bank's debt instruments by one notch due to sustained weakness in asset quality and net losses for four consecutive quarters. The bank's tier-2 bonds were revised down to A-/negative from A/negative, while the proposed ₹385 crore lower tier-2 bonds also received an A-/negative rating. The ₹500-crore certificate of deposits was downgraded to A1 from A1+. ESAF reported a net loss of ₹521 crore in FY25 and ₹81 crore in the first quarter, primarily due to elevated credit costs and interest income reversals. The outlook remains negative as profitability and asset quality pressures are expected to continue. CareEdge indicated the outlook could be revised to stable if the bank raises substantial equity capital or demonstrates significant asset quality improvement with reduced slippages.

ESAF Small Finance Bank reported total business of INR 42,507 crores, up 4.82% year-on-year for the quarter ended June 30, 2025. Deposits grew 8.7% to INR 22,698 crores while gross advances declined to INR 18,224 crores from INR 18,783 crores in the previous year. Net interest income dropped significantly to INR 378 crores from INR 588 crores, with net interest margin compressing to 6% from 9.4% previously. The bank faced asset quality challenges with gross NPA at 7.5% and net NPA at 3.8%, though provision coverage ratio improved to 73.2%. The microfinance loan book declined from INR 13,236 crores to INR 9,095 crores year-on-year, facing pressures particularly in Karnataka and Tamil Nadu. Gold loans emerged as a standout performer, growing 16% quarter-on-quarter and doubling year-on-year, now available in 662 branches. Secured assets increased to 54.79% of the loan book from 32.69% a year ago, with 90% of quarterly disbursements being secured loans. The bank executed NPA sales of INR 733.4 crores during the quarter and raised INR 65 crores through Tier 2 bonds. Management expects stress levels to stabilize in the second quarter with positive traction from the third quarter, targeting 70% secured assets by March 2027 and positive ROA by end of FY26.

ESAF Small Finance Bank's Board of Directors recommended the appointment of Shri. Karthikeyan M as Part Time Chairman and Non-Executive Independent Director for a three-year term starting December 21, 2025. The appointment is subject to RBI and shareholder approval. Karthikeyan M, a former Executive Director of Bank of India with over 36 years of banking experience, will replace Shri. Ravimohan Periyakavil Ramakrishnan who retires on December 20, 2025. Additionally, the bank's Management Committee approved the allotment of 5,000 non-convertible debentures worth Rs 50 crores on a private placement basis. The Basel II compliant lower Tier II subordinated bonds carry an 11.30% interest rate, have a 69-month tenure, and will mature on May 14, 2031. The NCDs are proposed to be listed on NSE's debt market platform.