Small finance banks in India are grappling with mounting pressure in their microfinance operations, with ESAF Small Finance Bank (ISIN: INE949L01017) among those facing significant challenges. Recent data reveals a concerning trend in the microfinance sector, particularly affecting ESAF and its peers.

Microfinance Portfolio at Risk

According to data from Sa-Dhan, approximately 20% of the microloan portfolios of three small finance banks - ESAF, Suryoday, and Utkarsh - are currently at risk. As of June-end, the portfolios at risk for more than 30 days stood at:

This high-risk exposure is largely attributed to the banks maintaining a 45-55% share of unsecured microloans in their portfolios.

ESAF's Financial Struggles

ESAF Small Finance Bank has been particularly hit hard by these challenges. In the June quarter, the bank:

• Sold ₹362.00 crore worth of loans to asset reconstruction companies
• Wrote off ₹371.00 crore

These actions have significantly impacted the bank's financial performance, resulting in reported losses for the period.

Asset Quality Deterioration

The asset quality of these small finance banks has seen a marked decline:

• ESAF's gross Non-Performing Asset (NPA) ratio stood at 7.48%
• Utkarsh's gross NPA ratio increased to 11.40% from 9.40% in the previous quarter
• Suryoday reported a gross NPA of 8.50%

Rating Downgrades

The financial stress has not gone unnoticed by rating agencies:

• CareEdge lowered ESAF's Tier 2 bonds to 'A-/negative'
• Icra downgraded Utkarsh's subordinated debt by two notches to 'A/negative'

Looking Ahead

The continued asset quality deterioration and high credit costs are expected to impact profitability for these banks in the September quarter and potentially for the full fiscal year. This situation underscores the challenges faced by small finance banks in managing their microfinance portfolios amidst economic uncertainties.

ESAF's Financial Performance

Despite the current challenges, it's worth noting ESAF's financial trajectory over the past few years:

While the bank has shown strong growth in revenue and profitability over the past year, the current microfinance stress poses significant challenges for its future performance. Investors and stakeholders will be closely watching how ESAF and other small finance banks navigate these turbulent times in the microfinance sector.

AU Small Finance Bank (AU SFB), India's largest small finance bank, has announced a strategic partnership with Zaggle Prepaid Ocean Services Limited, a leading spend management company, to launch co-branded retail credit and prepaid cards. This collaboration aims to revolutionize the banking experience for both retail and corporate customers.

Retail Credit Cards: Smart Spending and Easy Rewards

The partnership introduces a new retail credit card equipped with Third-Party Application Provider (TPAP) integration and a personalized recommendation engine. This innovative card focuses on:

• Smart spending tips
• Easy-to-earn rewards
• Tech-enabled convenience

The goal is to make everyday spending more rewarding and effortless for customers.

Commercial Credit Card Portfolio

AU SFB and Zaggle will expand their partnership to develop a comprehensive commercial credit card portfolio. This initiative combines:

• AU SFB's underwriting expertise
• Zaggle's extensive enterprise network

Corporate customers will gain access to Zatix, Zaggle's centralized SaaS platform, providing real-time visibility, control, and actionable insights into corporate spending.

Co-branded Prepaid Cards for Corporate Clients

The partnership also introduces a co-branded prepaid card program for corporate customers, offering:

• Tax-saving benefits through multiple wallets (fuel, meals, gifts)
• Expense and reimbursement tracking
• Support through the Zaggle mobile app

Expanding Reach and Services

As part of the collaboration:

• Zaggle will introduce AU SFB to its southern regional corporate network as a primary banking franchise
• The partnership aims to deliver innovative, technology-led payment solutions for both retail and corporate customers

Key Highlights

• Retail Credit Cards with TPAP integration and AI-powered recommendation engine
• Corporate Credit Cards supported by Zaggle's enterprise acquisition and Zatix SaaS platform
• Multi-Wallet Prepaid Cards for tax savings, fully managed via the Zaggle app
• Zaggle SAVE to automate employee expense reporting and reimbursements

Company Profiles

AU Small Finance Bank

AU Small Finance Bank recently received in-principle approval from RBI to transition to a Universal Bank.

Zaggle

Dr. Raj P Narayanam, Founder & Executive Chairman of Zaggle, expressed excitement about the partnership, emphasizing the delivery of innovative, technology-led payment solutions. Mr. Sanjay Agarwal, Founder, MD & CEO of AU Small Finance Bank, highlighted the alignment of this partnership with their vision of empowering businesses and consumers through smarter financial solutions.

This strategic alliance between AU Small Finance Bank and Zaggle is set to create a powerful suite of financial products and platforms, tailored for India's dynamic consumer and corporate ecosystem.