THRISSUR: After spending nearly two years steering itself away from stress in its microfinance portfolio, ESAF Small Finance Bank appears to have entered the next phase of its transformation.
The immediate challenge before the lender now seems to be mobilising deposits quickly enough to fund the rapid expansion of its secured loan book.
The bank's business update for the quarter ended June 30 showed advances growing 27.39 per cent year-on-year, significantly faster than the 18.62 per cent rise in deposits.
As a result, ESAF's credit-deposit (CD) ratio rose to 86.22 per cent from 80.17 per cent a year earlier, indicating that loan growth is running well ahead of deposit mobilisation.
The numbers also suggest that the bank's long-articulated strategy of reducing dependence on unsecured microfinance lending is gathering momentum.
Secured loans accounted for 62.38 per cent of gross advances at the end of June, compared with 58.50 per cent a year earlier, driven by strong growth in gold, retail, MSME and agriculture loans.
Microfinance continues to remain an important business segment, but its relative share of the portfolio is gradually declining.
The latest update indicates that ESAF is gradually moving beyond the first phase of its transformation, which was centred on stabilising asset quality and rebalancing its loan portfolio after the prolonged stress in the microfinance sector.
The focus is now shifting to sustaining that growth without allowing funding constraints to emerge.
Federal Bank CD in high-80%
To be sure, ESAF is not the only lender grappling with the challenge of mobilising deposits. Federal Bank's credit-deposit ratio also remains in the high-80 per cent range, reflecting the broader industry trend of credit demand outpacing deposit growth.
However, ESAF's circumstances are different because it is simultaneously executing a fundamental change in its business mix by increasing the share of secured lending.
The higher CD ratio, therefore, should not be viewed in isolation. Rather, it reflects the speed at which ESAF is expanding its secured loan franchise.
The more relevant question is whether deposit growth can keep pace with that expansion without materially increasing funding costs or constraining future loan growth.
Management has consistently maintained through FY25 and FY26 that the bank's long-term strategy is to build a more diversified and secured balance sheet with lower dependence on unsecured microfinance loans.
The June-quarter business update suggests that the strategy continues to make progress. The next phase of ESAF's transformation, however, may depend less on growing loans and more on strengthening the liability franchise needed to support that growth.
For investors, therefore, the key question may no longer be whether ESAF can move beyond its microfinance challenges. It may instead be whether the bank can mobilise deposits at a pace that matches its rapidly expanding secured loan portfolio.
