KOCHI: For ESAF Bank, the gap between its bad loans and net worth has been gradually closing signalling that the bank’s ability to absorb losses is diminishing.
With a gross NPA of Rs1,363.6 crore and a net worth of Rs1,864 crore, the bank’s bad loans already represent over 73 per cent of its entire net worth.
“This is a very precarious position as far as a financial institution is concerned,” stated a retired CFO of a bank while talking to businessbenchmark.news.
(A few bankers called me and said one need not compare the gross NPA with net worth and make the issue look precarious as provisioning has already brought dowm the NPA to Rs660.9 crore – which is the net NPA. While provisions on bad loans reduce a bank’s immediate risk, gross NPA is the ‘truer’ measure of a bank’s asset quality problem, as it reflects the total value of the ‘original’ lending decisions that have soured or become bad loan.
Comparing this gross figure to net worth is essential because it reveals the full amount of capital at risk, which in ESAF Bank’s case, is a substantial 73 per cent of its entire safety cushion.)
ESAF Bank is navigating a period of significant financial distress, as evidenced by a consistent deterioration in its asset quality and a sharp contraction in its net worth.
The bank’s latest quarterly results paint a challenging picture, marked by a soaring gross NPA, a net loss, and a substantial erosion of its shareholders’ equity.
The core of the bank’s woes lies in its microfinance loan book, which has long been the pillar of its operations. The bank’s gross Non-Performing Assets (NPA) have surged to a record high of 7.5 per cent for the quarter ending June 2025, up from 6.61 per cent a year ago.
This translates to a bad loan book of Rs1,363.6 crore, with microfinance loans alone accounting for a staggering Rs1,157 crore of that figure.
This alarming trend persists despite the bank having written off a substantial Rs1,224.9 crore in bad loans during the same period, suggesting that the rate of new defaults is outpacing the bank’s efforts to clean up its book.
This asset quality crisis has had a direct and painful impact on the bank’s profitability and net worth. ESAF Bank closed the first quarter of FY2026 with a net loss of Rs81.22 crore, a sharp reversal from a profit of Rs 62.77 crore in the same period last year.
Period of losses
The prolonged period of losses has taken a heavy toll on the bank’s shareholders’ equity, or net worth, which has contracted by a substantial Rs694 crore, from Rs2,550 crore to Rs1,864 crore as of June end, 2025.
In response to this sustained pressure, ESAF’s management is recalibrating its lending strategy to address the underlying vulnerabilities.
The bank has taken a proactive stance to contain its exposure to microfinance loans, which have been a primary contributor to its bad loans.
The microfinance loan book, which constituted 67.31 per cent of the total loan portfolio at Rs13,236 crore in Q1 2025, has now been aggressively scaled down to just Rs 9,095 crore, or 46 per cent of the total loan book as of Q1 FY2026.
This strategic pivot is a clear signal of the bank’s intent to reduce its reliance on the high-risk segment and focus on more secured assets.
ESAF’s management has acknowledged the challenges, stating in a recent interview that they are prioritising loan diversification, technology enhancement, and recovery efforts to stabilize the bank.
The bank has been actively expanding its secured loan portfolio, with gold loans being a key focus area, to bring down the share of unsecured loans from 47 per cent to 30 per cent over the next three to four years. While ESAF still maintains a strong capital adequacy ratio of 22.7 per cent, providing a buffer against further losses, analysts and stakeholders will be closely watching if these strategic shifts are enough to reverse the current downward spiral and restore investor confidence.
