ESAF Small Finance Bank has reported a significant strategic shift towards secured lending in its Q2 and H1 FY26 earnings call. The bank's total business stood at INR 42,031.00 crores, with secured assets now comprising 61% of gross advances, up from 39% a year ago.

Key Highlights

• Portfolio Transformation: The bank has successfully transitioned its loan portfolio, with secured loans now making up 61% of gross advances, compared to 39% in the previous year.

• Disbursements: Q2 disbursements more than doubled year-on-year to INR 8,913.00 crores, with 82% of new disbursements in secured loans.

• Gold Loans: Gold loans have been a primary driver of growth, with INR 6,500.00 crores disbursed in the current quarter. The gold loan portfolio now stands at approximately INR 8,000.00 crores.

• Microfinance: The bank has reduced its microfinance exposure, which now constitutes 39% of total gross advances, down from 61% last year.

• Asset Quality: Gross Non-Performing Assets (GNPA) marginally increased to 8.5%, while Net NPA remained stable at 3.8%. The provision coverage ratio improved to 74.4%.

• Deposits: Total deposits grew by 6% year-on-year to INR 22,894.00 crores, with retail deposits increasing by 11% to INR 22,082.00 crores.

• CASA Ratio: The Current Account Savings Account (CASA) ratio improved by 180 basis points to 26.4%.

Financial Performance

Strategic Outlook

• The bank aims to achieve a positive quarterly Return on Assets (ROA) in FY26.
• ESAF SFB targets 20-25% loan book growth on a year-on-year basis.
• The bank plans to further reduce its unsecured lending portfolio to 30% by FY27.
• Management expects credit costs to stabilize around 4% on a steady-state basis.

K. Paul Thomas, Managing Director and CEO, commented, "Our dual focus approach of building a sustainable, diversified balance sheet and deepening our social mission have helped us deliver consistent growth and value creation for our stakeholders."

The bank's strategic shift towards secured lending, particularly in gold loans, MSME, and affordable housing, is expected to strengthen asset quality and reduce portfolio concentration. ESAF Small Finance Bank remains focused on improving operational metrics and asset quality while targeting moderate business growth in the coming quarters.

As the bank continues to navigate the evolving financial landscape, it aims to leverage its strong rural and semi-urban presence to capitalize on the growing opportunities in India's underserved segments.

ESAF Small Finance Bank (ESAF SFB) has received a significant boost in its Environmental, Social, and Governance (ESG) credentials, as CareEdge ESG Ratings upgraded the bank's ESG rating from CareEdge-ESG2 to CareEdge-ESG1. This upgrade represents a substantial improvement in the bank's overall ESG score, rising from 68.10 to 75.40.

Key Highlights of the Upgrade

The upgrade reflects ESAF SFB's strong commitment to sustainability and responsible banking practices. Here are the main factors contributing to the improved rating:

1. Leadership in Workforce Diversity: The bank has shown exemplary performance in maintaining a diverse workforce.

2. Focus on Financial Inclusion: ESAF SFB continues to demonstrate a sharp focus on promoting financial inclusion.

3. Robust Governance Practices: The bank's governance framework has been recognized as a key strength.

4. Enhanced CSR Allocation: ESAF SFB has allocated more than the regulatory required Corporate Social Responsibility (CSR) funds, showcasing its commitment to social upliftment.

5. Strong Cybersecurity Framework: The bank boasts an ISO/IEC 27000-certified cybersecurity framework, enhancing its digital security posture.

6. Comprehensive Regulatory Compliance: ESAF SFB demonstrates full compliance with SEBI and Companies Act requirements.

Areas for Improvement

While the upgrade is significant, CareEdge ESG Ratings also highlighted some areas where ESAF SFB could further enhance its ESG performance:

• Absence of third-party verified climate-related data
• Limited coverage of emission accounting
• Lack of specified targets on emissions and energy consumption
• Small green loan portfolio
• Absence of external evaluation of existing policies
• Insufficient diversity at senior management levels

ESG Rating Details

The following table summarizes the key details of ESAF SFB's ESG rating upgrade:

This upgrade in ESG rating is a testament to ESAF Small Finance Bank's ongoing efforts to integrate sustainable practices into its core business operations. It also reflects the bank's commitment to transparency and responsible banking, which are increasingly important factors for investors and stakeholders in the financial sector.

As the banking industry continues to evolve with a greater emphasis on sustainable and responsible practices, ESAF SFB's improved ESG rating may position it favorably in the market. However, the areas identified for improvement suggest that there is still room for the bank to further enhance its ESG performance, particularly in environmental metrics and senior management diversity.