ESAF Small Finance Bank has approved the sale of non-performing assets (NPAs) and written-off loans worth up to ₹17 billion to an asset reconstruction company. This strategic decision represents a significant step in the bank's efforts to strengthen its balance sheet and improve asset quality.

Transaction Overview

The approved transaction involves the transfer of stressed assets worth ₹17 billion to an asset reconstruction company, which specializes in the recovery and resolution of distressed loans. This move is part of the bank's ongoing strategy to manage its loan portfolio more effectively.

Strategic Implications

The sale of NPAs and written-off loans to specialized asset reconstruction companies is a common practice in the banking sector to improve operational efficiency. By transferring these assets, ESAF Small Finance Bank can focus its resources on core banking operations while allowing specialized entities to handle the recovery process.

This transaction is expected to have several benefits for the bank's financial position. The removal of these stressed assets from the balance sheet could potentially improve key financial ratios and provide the bank with additional capital flexibility for future growth initiatives.

Asset Quality Management

The decision to sell these assets demonstrates the bank's proactive approach to asset quality management. Asset reconstruction companies have specialized expertise and resources dedicated to recovering value from distressed loans, which can often be more effective than traditional banking recovery methods.

The ₹17 billion transaction size indicates ESAF Small Finance Bank's commitment to addressing its stressed asset portfolio comprehensively. This bulk transfer approach allows for more efficient processing and potentially better recovery outcomes compared to individual asset sales.

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.