CareEdge Ratings has downgraded several debt instruments of ESAF Small Finance Bank (ESFBL), citing persistent weakness in asset quality and profitability. The Tier-2 bonds were revised to CARE A-/Negative from CARE A/Negative, with a negative outlook retained. The bank has reported a net loss of ₹521 crore for the year and ₹81 crore in Q1, marking four consecutive quarters of losses. Asset quality has sharply deteriorated, with GNPA rising to 7.48% (from 4.76%) and NNPA to net worth surging to 40.06% in just one quarter. The annualized slippage ratio stood at over 10%. In response, ESFBL is shifting strategy—reducing micro-banking exposure from 75% to 51% of advances and increasing focus on secured lending, particularly gold loans, which now account for 34% of the portfolio. Secured loans have risen from 23% to 59% of total advances. Despite the challenges, the bank maintains a strong CAR of 22.74% (Tier I: 18.44%) and raised ₹115 crore in Tier II capital. However, CareEdge stressed that a Stable outlook hinges on equity infusion, improved asset quality, and sustained capital buffers. The downgrade highlights the mounting pressures in ESFBL’s core microfinance operations and its critical transition phase to stabilize performance and restore investor confidence.

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