ESAFSFB - ESAF Small Finance Bank Ltd Share Price

Management Outlook:
ESAF Small Finance Bank's management emphasized a strategic shift toward secured lending (gold loans, mortgages, MSME) to reduce risk, targeting 45% secured portfolio by March 2025 (already at 43.35% in Q3 FY25). Growth in secured disbursements (76% of total vs. 40% YoY) and digital repayments (66% QoQ improvement) aims to enhance asset quality. While microfinance stress persists (gross NPA at 6.9%), recovery efforts (dedicated "war room," stricter underwriting, group meetings) and provisioning (PCR at 78.6%) are expected to stabilize the portfolio by FY26. Liquidity remains strong with 3.7% QoQ deposit growth and 92% retail deposits.

Major Points:

1. Portfolio Diversification: Secured lending surged (gold loans +82% YoY; MSME/mortgages +83% YoY), reducing unsecured exposure.
2. Asset Quality: Legacy microfinance NPAs persist, but fresh slippages are slowing. Net NPA stable at 2.9%.
3. Digital & Recovery: Digital collections rose to Rs.142 crore (Dec 2024) vs. Rs.53 crore (June 2024); stricter recovery protocols implemented.
4. Deposit Growth: CASA ratio at 24.9%; retail deposits dominate (92%).
5. Macro Factors: RBI rate cuts and rural credit demand recovery noted; microfinance stress likely to continue through FY25.
6. Expansion: Added 8.2 lakh customers in H1 FY25; 69% outlets in rural/semi-urban areas.

Management remains optimistic about gradual sector recovery, driven by disciplined lending and a secured loan focus.

Question 1:
"PCR grew to 78.6% from 59.5% in the corresponding quarter last year. How do you assess the adequacy of provisions, and do you anticipate further provisioning requirements in the near term? Given the increasing stress in unsecured loans across the industry, what changes have you made in underwriting practices and risk management to mitigate further asset quality risks?"

Answer:
The Bank prioritizes higher-than-regulatory provisioning to strengthen its balance sheet, even amid losses. Risk mitigation includes shifting to secured lending (43.35% of the portfolio) and adhering to microfinance guardrails (e.g., capping ticket sizes, limiting borrower exposure). Gold loans, growing 82% YoY, now dominate disbursements (76% secured), reducing unsecured risks.

Question 2:
"Legal actions and asset sales have not yet contributed significantly to reducing NPAs. Are there plans to sell stressed assets to asset reconstruction companies, and what quantum can we expect?"

Answer:
The Bank holds ~Rs.1,000 crore of fully provisioned, saleable NPAs. While open to asset sales, emphasis remains on recovery efforts via field engagement, digital collections (up 66% QoQ), and a dedicated recovery framework for business correspondents to ensure accountability.

Question 3:
"How has technology improved collections? Have digital interventions like automated reminders and analytics-based tracking yielded better recovery rates?"

Answer:
Digital collections rose to Rs.142 crore in Q3 (from Rs.53 crore in June 2024). Predictive analytics and district-level delinquency tracking guide field actions. Automated reminders, SMS blasts, and revived group meetings enhance repayments, with 99.7% collection efficiency in post-April 2024 loans.

Question 4:
"Share PAR-0 numbers for Q1, Q2, Q3 FY25 and collection efficiency."

Answer:
SMA-0 (PAR-0) stood at Rs.448 crore (Q1), Rs.506 crore (Q2), and Rs.501 crore (Q3). Collection efficiency (excluding NPA) improved to 91.47% in Q3.

Question 5:
"What is the yield on disbursements for agri, MSME, and mortgage segments? Will provisioning reduce in future quarters?"

Answer:
Yields: Agri (13.24%), MSME (10.83%), mortgage (11.38%), gold loans (13%). Provisions are expected to decline as slippages moderate, supported by stricter underwriting, recovery efforts, and a secured portfolio shift.

Question 6:
"What is the microfinance NPA breakdown? How are states like Kerala, Tamil Nadu, and MP performing?"

Answer:
Microfinance NPAs total Rs.1,131 crore (89% of total NPAs). Kerala improved due to targeted recovery; Tamil Nadu remains challenging. Karnataka saw recent stress, but regulatory clarity may ease operations.

Question 7:
"Are gold loan disbursements targeting microfinance customers? How are January collections trending?"

Answer:
~20% of gold loans go to microfinance customers. January collections improved sequentially, with newer disbursements (post-April 2024) showing 99.7% efficiency.

Question 8:
"Will PCR remain ~80%, or will provisioning ease? What growth is projected for FY25/26?"

Answer:
Provisioning will align with slippage trends, expected to decline as recoveries improve. FY25 loan growth is projected at ~10%, with secured lending driving stability. FY26 guidance awaits March clarity.