ESAF Small Finance Bank (NSE: ESAFSFB) reported a net profit of ₹7.12 crore for the third quarter, supported by a 150% year-over-year surge in disbursements. Strategic shifting toward secured assets and the transfer of non-performing portfolios to an asset reconstruction company highlight the bank’s recovery efforts.
The bank returned to profitability in the third quarter ended December 31, 2025, posting a net profit of ₹7.12 crore following a substantial loss in the preceding quarter. The recovery was driven by a 170.8% sequential increase in pre-provision operating profit and a continued transition toward a secured loan mix. While the bank continues to face year-over-year pressure on net interest income, total disbursements reached ₹12,997 crore, representing significant growth compared to the same period last year.
Credit Cleanup
The bank’s sequential improvement in financial metrics was supported by the transfer of a stressed loan portfolio to an Asset Reconstruction Company. The transaction involved approximately 544,406 loan accounts with an aggregate principal outstanding of ₹1,693.65 crore. The transfer generated one-time income of about ₹69 crore, reflected in other income for the quarter, and coincided with a reduction in gross non-performing assets to 5.6% in Q3 FY26 from 8.5% in the preceding quarter. During the quarter, the bank also raised ₹150 crore of Tier II capital, strengthening its regulatory capital position.
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Product Highlights
The bank remains focused on its MARG portfolio, comprising MSME, Agriculture, Retail, and Gold loans, which grew 38% year-to-date and now accounts for 59% of total gross advances. Specific product advancements include the launch of bank credit cards and expanded corporate agency partnerships with Kotak Life, Edelweiss Life, and Care Health Insurance to broaden its third-party insurance offerings. The bank also maintains a diverse range of agri-lending products, such as the ESAF Kisan Credit Card and Haritha Loan, alongside micro-enterprise and affordable housing loans.
Financial Performance
For the quarter ended December 31, 2025, the Bank reported:
- Net Profit: ₹7.12 crore, a recovery from a loss of ₹115.81 crore in Q2 FY26.
- Interest Income: ₹894.05 crore, a 9.1% sequential increase but a 5.7% decline year-over-year.
- Net Interest Income (NII): ₹432.33 crore, up 16.3% from the previous quarter.
- Asset Quality: GNPA stood at 5.6% and Net NPA (NNPA) at 2.7%, down from 8.5% and 3.8% respectively in the prior quarter.
- Margins: Net Interest Margin (NIM) was 6.1% for the period ended December 2025, compared to 8.1% for the full year 2025.
- Capital Adequacy: The bank maintained a strong Capital To Risk-Weighted Assets Ratio (CRAR) of 22.7%.
- Deposits: Total deposits reached ₹24,006 crore, reflecting a 7.1% year-over-year growth, with a CASA ratio of 25.1%.
Portfolio Mix
The bank continues to prioritize balance-sheet de-risking through a higher secured loan mix, with secured advances increasing to 63% as of December 2025 from 45% a year earlier. Distribution remains focused on rural and semi-urban markets, which account for 69% of the bank’s 788 banking outlets. Operational initiatives include scaling fee-based income via third-party product distribution and using data analytics to strengthen risk assessment and customer segmentation. Recovery-focused execution, supported by a dedicated workforce and calibrated ticket sizes, remains a key component of asset quality management.
Sector & Macro Context
As a Scheduled Commercial Bank with a national footprint across 24 states and 2 UTs, ESAF SFB operates within India’s small finance bank sector with a mandate for financial inclusion. The bank’s focus on unbanked and under-banked segments in rural and semi-urban areas aligns with broader regulatory objectives for the sector. Despite current profitability challenges, the bank maintains high ESG ratings, recently upgraded to a score of 75.4 by CareEdge, placing it in the “Leadership Position” category.
Investment Thesis (Bull Vs. Bear)
Bull Case
Sequential profitability recovery
- The bank reported a profit of ₹7 crore in Q3 FY26, reversing a ₹116 crore loss in Q2 FY26, supported by a sharp rise in pre-provision operating profit to ₹253 crore.
Strong operating leverage
- Nine-month pre-provision operating profit reached ₹471 crore, indicating core earnings capacity despite bottom-line volatility.
Balance sheet growth with secured tilt
- Gross advances grew 13.1% YoY to ₹20,679 crore, with secured loans rising to 63% of the portfolio, reducing unsecured credit exposure.
Stable deposit franchise
- Deposits increased 7.1% YoY to ₹24,006 crore, with a retail share of 93%, supporting funding stability.
Capital buffer remains strong
- CRAR at 22.7% and Tier I at 16.0% provide loss-absorption capacity during earnings normalization.
Asset quality improvement actions
- Loan transfers to asset reconstruction companies contributed to GNPA moderating to 5.6% and NNPA to 2.7% by December 2025.
Bear Case
Nine-month losses persist
- The bank reported a net loss of ₹190 crore for 9M FY26, indicating that profitability recovery is not yet established on a cumulative basis.
Margin compression evident
- Net interest margin declined to 6.1% in December 2025 from 8.1% in FY25, reflecting higher funding costs and yield moderation.
Asset quality remains elevated
- GNPA at 5.6% and NNPA at 2.7% remain above long-term averages, despite ARC transfers and provisioning actions.
Provisioning sensitivity
- Profitability remains sensitive to provisioning levels, as evidenced by large losses earlier in FY26 and reduced PCR following stressed asset transfers.
Limited treasury contribution
- Treasury segment income and results declined on a year-on-year basis, reducing diversification benefits to earnings.
No formal earnings guidance
- The bank has not provided quantitative growth or profitability guidance, limiting near-term earnings visibility.