Reporting from DUBAI: ESAF Small Finance Bank, once a poster child for high-yield microloans and sky-high deposit rates, is navigating a delicate balance as legacy bad loans weigh on its equity.
As of September 2025, ESAF’s GNPA stands at 8.54 per cent, with net NPAs at 3.83 per cent. With a net worth of just Rs1,748.50 crore, the gross NPA represents nearly 93.5 per cent of its equity, highlighting a thin capital cushion against potential losses.
ESAF bank reported a net loss ofRs115.81 crore for Q2 FY26, reflecting ongoing provisioning pressures from its legacy microfinance portfolio.
Pivot to secured lending
In response, ESAF is aggressively shifting from high-risk microloans to secured lending. Secured loans now account for 61 per cent of gross advances, up from 39 per cent a year ago, while the microfinance portfolio has been reduced to 39 per cent.
Gold loans have emerged as the standout performer, more than doubling to Rs7,500 crore, and comprising 82 per cent of total disbursements in Q2 FY26. MSME, agri, mobility, and mortgage loans are also growing, underscoring ESAF’s move toward a collateral-backed, lower-risk lending model.
Deposit base and CASA strength
The bank continues to build a sticky, retail-heavy deposit franchise. Total deposits rose 5.9 per cent YoY to Rs22,894 crore, with retail deposits making up 96 per cent, and CASA balances increasing 14 per cent YoY to Rs6,046 crore, boosting the CASA ratio to 26.4 per cent.
This demonstrates customer trust even as the bank winds down its era of above 9 per cent deposit rates.
Legacy microfinance stress persists
Despite growth in secured lending, high provisioning requirements persist. Of the Rs340 crore stressed loans this quarter, Rs255 crore came from microfinance slippages, reflecting the lingering impact of ESAF’s previous high-risk, high-yield model. With GNPA near net worth, even moderate shocks could strain capitalization.
Peer comparison highlights vulnerability
Among small finance banks, ESAF is relatively exposed. While Equitas SFB reports a GNPA of 2.89 per cent, more moderate than ESAF, peers like Suryoday SFB (8.5 per cent GNPA) and Utkarsh SFB (9.43 per cent GNPA) show that high NPA stress is not isolated to ESAF.
However, ESAF’s thin capital buffer makes it more vulnerable than many peers, emphasising the need for careful management and potential capital augmentation.
Relevance as a small finance bank
The strategic downsizing of unsecured loans challenges ESAF’s identity as a small finance bank traditionally focused on high-yield microcredit for underserved segments.
With the old model of above 25 per cent loan rates and above 9 per cent deposits ending, ESAF is repositioning itself toward a lower-margin, risk-aware, secured lending franchise, balancing financial inclusion with capital stability.
The road ahead
ESAF has strong foundations: granular retail deposits, expanding secured portfolios, and rural reach (70 per cent of branches in rural areas).
Yet, legacy NPAs and a thin net worth demand careful execution. The bank’s ability to manage NPAs, scale secured lending profitably, and possibly raise additional capital will determine whether it can emerge as a resilient small finance bank in the post-high-interest era.
