Summary
ESAF Small Finance Bank Limited - Q3 FY26 Earnings Call Summary Monday, February 02, 2026, 10:00 A.M. IST
Event Participants
Executives 4 Dr. K. Paul Thomas (MD & CEO), George K. John (Executive Director), Gireesh C.P. (EVP & CFO), Hari Velloor (EVP - Credit)
Analysts 2 Chinmay Nema (Prescient Capital), Deepak Poddar (Sapphire Capital)
Financials & KPIs
| Metric | Reported | Commentary |
|---|---|---|
| Total Deposits | ₹24,006 crores | +7% YoY; 93% comprises retail deposits, showing high granularity. |
| Gross Advances | ₹20,679 crores | +13% YoY; driven by secured lending under the MARG strategy. |
| Disbursements | ₹13,000 crores | +134% YoY and +46% QoQ; 81% of Q3 disbursements were in secured segments. |
| GNPA | 5.6% | Significant reduction from previous quarters; helped by an ARC sale of ₹1,018 crores. |
| NNPA | 2.7% | Improved sequentially; management targeting further reductions via recoveries. |
| Net Interest Income (NII) | ₹432 crores | +16.1% QoQ (from ₹372 crores); driven by credit growth and lower slippages. |
| Net Interest Margin (NIM) | 6.6% | +70 bps QoQ; benefit of lower cost of funds outweighed yield compression. |
| PPOP | ₹253 crores | +171% QoQ and +98% YoY; reflects improved operating leverage and ARC sale. |
| PAT | ₹7 crores | Turned positive this quarter; marks a return to profitability after industry-wide stress. |
| CASA Ratio | 25.1% | +8% YoY growth in CASA balances to ₹6,030 crores. |
| Capital (CRAR) | Not explicitly stated | Management noted strong governance and de-risking but did not specify Q3 % in transcript. |
Geographic & Segment Commentary
- MARG (MSME, Agri, Retail, Gold): This secured framework now accounts for 60% of total advances. Gold loans were the standout performer, growing 89% YoY and 16% QoQ due to rural/semi-urban demand.
- Microfinance Asset Class: The MFI portfolio was rationalized from ₹10,000 crores to ₹7,500 crores YoY to de-risk. Collection efficiencies are improving, and the bank is shifting MFI focus from group to individual loans.
- Secured vs. Unsecured Mix: Secured assets now constitute 63% of gross advances compared to 45% a year ago. The unsecured portfolio declined 24% YoY as part of a deliberate diversification strategy.
Company-Specific & Strategic Commentary
- MARG Strategy: A deliberate shift toward MSME, Agri, Retail, and Gold loans to achieve a 70% secured portfolio by March 2027.
- Digital Transformation (ESAF 2.0 StratoNeXt): Major IT overhaul targeted for “go-live” in Q2 FY27 to improve scalability, risk management, and data governance.
- Operational Efficiency: Focus on revamping the “Sangam” meeting process for MFI and intensifying follow-ups on delinquent accounts to lower credit costs.
- Network Reach: Expanded footprint to 788 banking outlets and 1,042 customer service centers across 24 states to deepen rural penetration.
Guidance & Outlook
| Metric | Guidance / Outlook | Commentary |
|---|---|---|
| Loan Book Growth | ~15-16% for FY26; ~25% for FY27 | FY26 is a year of consolidation; FY27 will see accelerated growth as asset quality stabilizes. |
| Credit Cost | 2% to 3% (Normalized) | Expected to reach these comfortable levels by Q1 FY27 as slippages moderate. |
| ROA | 1.5% to 2.0% (Steady State) | Expected to stabilize by FY28 after absorbing P&L backlogs from previous quarters. |
| Portfolio Mix | 70% Secured Assets | Target completion date set for March 2027 under the MARG framework. |
Risks & Constraints
| Risk | Context |
|---|---|
| MFI Industry Stress | While stabilizing, the bank has faced five quarters of industry-wide stress; recovery is dependent on sustained borrower behavior and industry discipline. |
| Yield Compression | A shift toward secured lending (Gold/Agri) and a lower repo rate environment (down 125 bps in 2025) puts pressure on asset yields. |
| P&L Backlog | Management noted that reaching full ROA potential will take until FY28 due to the need to absorb historical credit cost backlogs. |
Q&A Highlights
Asset Quality & Credit Costs
- Question: When will credit costs normalize and what is the steady-state expectation? (Deepak Poddar)
- Answer: Credit costs have already moderated QoQ. We expect visible improvement by Q1 FY27, with a steady-state normalized cost of 2% to 3% as the portfolio mix shifts (Gireesh C.P.).
Profitability Metrics
- Question: What is the target steady-state ROA given the change in portfolio mix? (Deepak Poddar)
- Answer: While FY27 will see improvement, the full impact of 1.5% to 2.0% ROA will likely be realized in FY28 as backlogs are absorbed (Gireesh C.P.).
NPA Management
- Question: What were the write-offs and ARC sales for the 9-month period? (Chinmay Nema)
- Answer: The bank did not perform technical write-offs this year. Instead, it conducted ARC sales totaling ₹1,018 crores (Gireesh C.P.).
Growth Outlook
- Question: What is the loan growth expectation for the current and next fiscal? (Deepak Poddar)
- Answer: We expect to end FY26 with ~15-16% growth. For FY27, we are guiding for approximately 25% growth (Gireesh C.P., George K. John).
Key Takeaway
ESAF Small Finance Bank marked a turnaround in Q3 FY26, returning to a PAT of ₹7 crores following a period of industry-wide microfinance stress. The bank successfully executed its “MARG” strategy, increasing the secured asset mix to 63% of total advances compared to 45% a year ago, with gold loans growing 89% YoY. Asset quality improved significantly with GNPA falling to 5.6%, aided by a ₹1,018 crore ARC sale and a sharp reduction in slippages to ₹219 crores. While NIMs improved to 6.6% due to lower funding costs, management views FY26 as a year of consolidation. Looking ahead, the bank guides for 25% loan growth in FY27 and expects credit costs to normalize to 2-3% by Q1 FY27. The long-term goal remains reaching a 70% secured portfolio by March 2027 and stabilizing ROA at 1.5-2.0% by FY28.
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