CARE Ratings has revised its outlook on ESAF Small Finance Bank to 'stable' from 'negative' while reaffirming the rating at 'CARE A-'. The agency has also affirmed the bank's short-term rating at 'CARE A1', according to reports from Business Standard. This upgrade reflects material moderation in fresh slippages and asset-quality stress, along with resultant improvement in the bank's profitability. The rating revision comes after the bank demonstrated sustained profitability recovery following a challenging period.
After five consecutive quarters of losses from Q2FY25 to Q2FY26, ESFBL started reporting profits from Q3FY26 and the profits have been growing quarter-on-quarter. The bank's profit after tax (PAT) improved from a loss of ₹116 crore in Q2FY26 to profits of ₹80 crore in Q1FY27, as reported by Business Standard. This sequential turnaround was supported by moderation in slippages, recovery in margins, and improved operating efficiency. While return on average total assets (RoTA) increased to 1.04% in Q1 FY27, annualised credit cost remained elevated at 3.1%, partly due to additional provisioning.
The bank's asset quality showed significant improvement with gross non-performing assets (GNPA) and net NPA (NNPA) moderating to 5.40% and 0.83%, respectively, as on 30 June 2026, compared to 8.54% and 3.83% respectively as on 30 September 2025, according to Business Standard. Slippages declined sequentially from ₹468 crore in Q1FY26 to ₹75 crore in Q1FY27. The bank undertook a significant portfolio clean-up, including the sale of NPAs aggregating ₹1,019 crore to asset reconstruction companies in FY26. Net stressed assets to net worth declined to 11.9% from 45.9% as on 30 September 2025.
The bank's operating profile has been strengthened by significant portfolio rebalancing as the share of microfinance loans/unsecured loans declined from 69% of gross advances as on 1 March 2024, to 38% as on 30 June 2026, as reported by Business Standard. The micro, small and medium enterprise (MSME), agriculture, retail and gold (MARG) portfolio contributed 56% of gross advances, while emerging household loans accounted for 32% as on 30 June 2026. This diversification should support stability in earnings and asset quality in the medium term, though increasing concentration in gold loans (42% as on June 2026) and lower yields associated with secured lending could keep margins lower than historical highs in FY24.
The scrip advanced 1.23% to end at ₹42.01 on the BSE following the rating announcement, according to Business Standard. The Kerala-based small finance bank, which received scheduled bank status from RBI on 27 December 2018, is currently focused on retail banking business with presence in micro-finance, housing finance, business loans, loan against property (LAP), gold loans and financing solutions for marginal customers. The ratings continue to derive strength from the bank's experienced management and granular retail deposit franchise, though these strengths are partially offset by elevated gearing, moderate current account and savings account deposits, geographical and product concentration, and the need to demonstrate sustained profitability and lower credit costs over a longer period.
