ESAF Small Finance Bank (ESAFSFB.NS) Q2 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the ESAF Small Finance Bank Limited Q2 H1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. [ Ayushi Gupta ]. Thank you, and over to you.

Thank you. Good morning, ladies and gentlemen. I welcome you all to earnings conference call of ESAF Small Finance Bank Limited to discuss the Q2 and H1 FY '26 business performance. Today on the call, we have from the management, Mr. K. Paul Thomas, Managing Director and CEO; Mr. Gireesh C. P., CFO; Mr. George K. John, Executive Director; and Mr. Hari Velloor, Executive Vice President for Credit. Before we proceed with this call, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For more details, kindly refer to the investor presentation and other filings that can be found on the company's website. Without the ado, I would like to hand over the call to the management for their opening remarks, and then we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you. Thank you so much. Good morning to all. On behalf of ESAF Small Finance Bank, I welcome you to the Q2 and H1 FY '26 Earnings Call. We appreciate your continued interest in ESAF SFB, and thank you for joining us to review our business and financial performance. Joining me today are Mr. George K. John, Executive Director; Mr. Gireesh C.P., EVP and CFO; Mr. Hari Velloor, Executive Vice President. At ESAF SFB, financial inclusion remains the cornerstone of our purpose while our strategy balances impact with profitability. Our dual focus approach building a sustainable, diversified balance sheet and deepening our social mission have helped us deliver consistent growth and value creation for our stakeholders. As a result, by offering a wide range of innovative products, banking services, distribution channel, and customer service, we have been able to expand our rural, semi urban and urban presence in all customer segments, across retail and other businesses. During the first half of FY '26. We continue to broaden our retail franchise, especially across secured lending segments, gold loans, MSME, mortgages, mobility and agri loans. This strategic shift is strengthening asset quality, reducing portfolio concentration and derisking the business model. Our emphasis on data-driven credit, disciplined underwriting and risk governance supports this transformation. Our technology-led distribution model, integrating physical reach with digital capabilities enables us to serve customers across rural, semi-urban and urban markets efficiently. This, in turn, is helping us enhance CASA growth, drive cross-sell and improve operating leverage. The Indian economy remains on strong growth momentum driven by domestic demand, favorable monsoon conditions, lower inflation, structural reforms like GST 2.0 and various developmental and regulatory measures announced by RBI, aimed at strengthening the banking sector and improving credit flow. ESAF Small Finance Bank is well positioned to capture these opportunities through its customer-centric strategy, strong governance and prudent capital management. At ESAF Small Finance Bank, our mission remains deeply rooted in social responsibility and ethical governance. We continue to invest in a robust risk management framework, transparent disclosures and responsible banking practices, ensuring that we build long-term shareholder value while staying true to our founding purpose of transforming lives and livelihoods. Before we begin the detailed presentation, I'm pleased to inform you that the banks has appointed, Shri Karthikeyan M, a veteran commercial banker and former Executive Director of Bank of India, former Director of Star Union Dai-ichi Life Insurance company, former nominee director, Bank of India, Investment Managers Private Limited, as a part-time Chairman for a period of 3 years effective from December 21, 2025. His vast experience in commercial banking and governance will greatly strengthen our Board and strategic direction. I now invite our Executive Director, Mr. George K. John, to take you through the next segment.

Thank you, Paul sir, and good morning, everyone. Let me begin by providing a brief perspective on the broader macroeconomic regulatory environment that frames our business performance. The Reserve Bank of India in its October monetary policy committee meeting kept the repo rate unchanged at 5.5 percentage, maintained a neutral stance. This was the second consecutive [ post ] following a cumulative 100 basis points cut -- rate cut earlier in the year. The standing deposit facility rate and marginal standing facility rate also remains unchanged at 5.25 percentage and 5.75 percentage, respectively. Importantly, the Reserve Bank of India revised India's FY 2026 GDP growth estimates upward to 6.8 percentage from 6.5 and lowered CPI inflation forecast to 2.6 percentage from 3.1 percentage earlier, reflecting continued macro stability and resilient domestic demand. On the regulatory front, the RBI draft circular on the expected credit loss framework, though currently not applicable to small finance banks, signals a strong move towards the global best practice in credit risk provisioning and transparency. We view this positively as it underscores the sector's gradual convergence to universal bank standards. The centralized state government credit schemes like CGFMU, CGTMSE et cetera, continue to play a critical role in expanding formal credit access. Turning to the ESAF Bank performance, the second quarter of FY '26 demonstrated sequential improvements across key business metrics. The bank is progressing well on its strategic priorities of quality growth, prudent risk calibration and operational efficiency. As of 30th September 2025, our total business stood at [ INR 42,031 crores ] compared to [ INR 39,095 crores ] a year ago reflecting Y-o-Y growth of 5 percentage. [indiscernible] grew by 4 percentage and [indiscernible] by 6 percentage. Our disbursements grew 95 percentage Y-o-Y or 16 percentage quarter-on-quarter, driven by gold, MSME and affordable housing products. This reflects robust demand and a successful transition towards secured quality growth. The significant structural change is visible in our portfolio composition. The macro loan book, which was [ INR 11,100 crores ] in Q2 FY '25 has declined to INR 7,400 crores in Q2 FY '26, in line with our derisking strategy. This reduction has been offset by strong traction in affordable housing, MSME, gold loan, vehicle loan and other retail loans. Among these gold loan was a standout performer, up 12 percentage quarter-on-quarter and more than doubled on Y-o-Y, reflecting robust and recurring demand from our rural and semi-urban customer base. As a result, secured now constitutes 61% of our gross advances, up from 39% a year ago. We remain firmly on track to achieve our 70 percentage secured portfolio target by March 2027. The significant shift validates the success of our strategy in building a more resilient, more quality portfolio with stable yield and lower credit cost. Our distribution footprint continues to be 1 of our strongest differentiation, 788 banking outlets, 718 ATMs, over 1,110 customer service points -- customer service centers and 33 institutional business correspondents across 24 states and 2 union territories, enabling deep penetration in the targeted markets. On the microfinance side, after 4 to 5 quarters of stress across the industry, early signs of normalization are visible. The sector's renewed focus on credit discipline and improved collection efficiencies indicates that Q2 may have marked the [ border ] of the cycle. Our micro finance strategy includes revamping the group meetings process for stronger field connects, targeted new customer acquisition and focused graduation of group loans to individual loans and delinquent borrowers follow-up. With the SROs broadly now operational, our microfinance portfolio is stabilizing with improving collection efficiency, supported by disciplined underwriting and focused risk management framework to achieve sustainable and quality growth. With these comments, I now invite our EVP and CFO, Mr. Gireesh C. P., to take you through the financial performance.

Thank you, sir. Good morning, everyone. I thank all the participants for taking time for joining us on the call. Let me give you an overview of our financial performance highlights for Q2 FY '26. As of 30 September 2025, gross deposit stood at INR 22,894 crores, up by 6% Y-o-Y from INR 21,613 crores. Our focus remains on building a granular and stable base. As a result, total retail deposits rose to INR 22,082 crores as of September 30, 2025 from INR 19,891 crores a year ago, marking a robust 11 percentage Y-o-Y growth. The share of retail deposits and total deposits improved further from 93 percentage in FY '25 to 96 percentage in Q2 FY '26, a clear reflection of our stickiness and quality of our franchise. CASA balances remained the key pillar of our deposit profile, reaching INR 6,046 crores in Q2 FY '26 as compared to INR 5,319 crores in Q2 FY '25 translating to a growth of 14 percentage Y-o-Y. CASA ratio improved strongly by 180 basis points to 26.4 percentage. The downward repricing of deposits had a partial impact to a marginal reduction in cost of funds. The remaining benefit will be accruing on maturing the term deposits, which will get renewed at lower rates and this trend will continue in the coming quarters. Our CASA growth strategy is anchored on superior customer service, differentiated savings products and acquisition through digital mode and expanding the distribution network. Gross advances stood at INR 19,137 crores, up from INR 18,340 crores in Q2 FY '25, reflecting our calibrated approach to lending. Disbursements for the quarter were INR 8,913 crores almost 2x compared to the disbursements of INR 4,058 crores during last year Q2. Importantly, secured loans constituted 82 percentage of the total disbursements consistent with our derisking and sustainability strategy. Securing retail portfolio, which is predominantly retail and includes vehicles, mortgages, gold loans, continues to deliver strong performance, both in Y-o-Y and Q-o-Q basis. Meanwhile, the unsecured portfolio, which comprises of micro loans declined 33 percentage Y-o-Y and 1 percentage Q-o-Q. It's now forming 39 percentages of total gross advances compared to 61 percentage of last year. We believe microfinance book is largely stabilized, and our focus is now on quality growth and recoveries. Net interest income for the quarter was INR 364 crores compared to INR 378 crores in Q1 FY '26. The net interest margin at 5.9 percentage also remained stable sequentially. The recent moderation in NIM reflects the shift in portfolio mix towards secured lending and disciplined loan growth, but with reducing cost of funds and increased disbursements, we expect positive improvement going forward. Noninterest income, excluding the treasury and PSLC sales improved during the quarter by 182 percentage from INR 29 crores to INR 82 crores on Y-o-Y sequentially. Preprovisioning operating profit after considering the treasury and PSLC came in at INR 93 crores versus INR 125 crores in Q1 FY '26 impacted by lower other income. As on Q2 FY '26, gross NPA marginally increased to 8.5 percentage while our net NPA was stable at 3.8%, reflecting both the prevailing macro conditions and our cautious stance on micro finance lending. However, our provision coverage ratio improved to 74.4 percentage demonstrating our continuous focus on strengthening the balance sheet, thanks to the stringent policy to provide over and above the minimum levels prescribed by the regulator. This supports our cushion against potential stress. Slippages moderated to INR 340 crores in Q2, down from about INR 450 crores in the previous 2 quarters, driven by improved trends in the micro banking segment and better SMA performance observed over a few quarters. We remain focused in bringing down both growth and net NPAs to more sustainable levels over the next few quarters. This will be driven by enhanced monitoring, proactive collection strategies and sharper risk management exercise across all lending segments. Further accelerating NPA recoveries remain a top priority. We are also expanding our secured asset portfolio, especially in gold mortgages, MSME and agri to diversify the book towards more stable and profitable segments. Based on the current trend in business and delinquency levels, we expect to achieve positive quarterly ROA in FY '26 since the operating performance strengthens and provisions are expected to normalize. FY '26 will be a year of consolidation, one where we target moderate business growth while sharply improving operational metrics and asset quality. We continue to improve internal productivity, optimize resource allocation and reduce operating costs while maintaining the high quality and reliability of our customer services with the risk environment in the microbanking sector showing early signs of stabilization. And with the strategic actions we have implemented in asset sales, secured loan book growth and portfolio diversification, ESAF SMB is well positioned for a stronger and more resilient footing to drive our next phase of expansion. Thank you very much.

Sir, can we begin the question-and-answer question.

Yes.

[Operator Instructions] The first question comes from the line of [ Varun Mishra ] from [ SK Investments ].

I have a couple of questions from my end. So like over the past few quarters, you've seen a clear strategic shift towards the loan book, like in terms of secured lending with loans are now forming about 61% of the total advances, up from like 39% a year ago. So like what is the share of micro finance loans, which has been steadily declining, I see. So can you please elaborate like key factors for this transition, like what are we seeing? How is it backing?

Yes. The strategic shift stated today -- from September, it is secured loan is 61 percentage and micro loan percentage has come down to 39 percentage. So this is what we have planned to achieve in 2027, we were able to achieve this well very early.

All right, sir. And sir, additionally, how would you -- how should we think about the bank's focus either in terms of like particularly balancing growth between like the secured segment and unsecured segments?

Yes, the secured, almost the same level, 30, 35 percentage unsecured and the 65 percentage secured. That's our plan by the current year end.

[ Varun ], I add here, if you see our earlier investor calls also over the last 3, 4 quarters, this is what we have been projecting as a bank. So strategically, we are on course in terms of implementing that strategy.

All right, sir. Got it. And like, sir, the Q2 disbursements like have more than doubled Y-o-Y. Like could you elaborate the key drivers behind the strong growth momentum. Like was it primarily led because of the gold loans or like a broader retail secured products?

You're right. That's Varun again, right? So Varun, what we've been doing when we shifted to 61% secured, primarily the driver has been gold loans. So in the current quarter, INR 6,500-odd crores of gold loans have been disbursed. While if you look at the micro segment, INR 1,500 crores have been disbursed, but the good thing, what we have to say is that after what do you say, a few quarters where we have been controlling micro, we've been focusing completely on quality. We've been putting the guard rails into force, et cetera, et cetera. Since August and looking at the overall environment in terms of the country, since August, we are seeing a slight uptick in terms of micro disbursements also. So within the overall strategy of remaining at 35% unsecured, now that we have the confidence, we have started ramping up micro. Keeping in mind that we will not go above 35%.

The next question comes from the line of Shailesh Kanani Centrum Broking.

I had a couple of questions. Sir, in terms of SMA book, so retail has seen some sequential spike. So just wanted to understand any early signs or some color on that in terms of bounce rates, other things what you can share. Second is, as we proceed towards more and more secured book, I see the secured book has comparatively far lower yields. So what levers do we have in terms of protecting the NIMs over there? And third, on -- sorry, yes. My third question is with respect to OpEx. If you can give some guidance in terms of cost-to-income, OpEx to asset for FY '26-'27?

Yes. First of all, I will talk about the yield, how it is going forward when we diversify the business. Yes, microfinance is giving me more yield, which is when I have shifted the micro banking proportion with more secured advances, the NIM is bound to come down. However, the operational expenditure, it is directly related to the BC commission, et cetera. That also has come down. And therefore, going forward, and what happened during the last 1 year is that because of the repo rate changing by 1 percentage all the variable interest rate has -- also has been passed on to the customers. And that is why recently, we are observing a NIM contraction. But going forward, and at the same time, the deposit book also, we have rationalized the rates, but the effect of which will be flowing over a period of time. It has already been seen around 25 basis points we have already seen. And going forward, we will see the full benefit flowing in, in the coming quarters. And on the retail book, Yes, as a starter, we were giving some sweetening on the pricing. However, we are moderating the pricing to see that the NIM going forward, it will improve further. And on the OpEx front, yes, we are taking all possible steps to curtail the OpEx. And once the income levels increase, the cost/income ratio also will improve somewhere around 60 to 65 percentage we are comfortable. So towards that, we are working now.

Just a follow-up on that, we are seeing lower NIMs will be compensated by lower OpEx, and we are also planning to increase the yield on the RA book. Is that understanding right?

Yes, yes, correct. For example, today, our gold loan book average yield is 13.4%.

So there is ample room for improvement in all the retail book. As the strategy, as a starting point, we have given some kind of moderation in the rates, so we are -- step by step, we are increasing the rates.

Fair enough, sir. Sir, and my third question with respect to the SME book, especially on the retail front?

Would you repeat that, Shailesh?

Yes, yes, sure. So I just wanted to understand on the retail SMA book. So SMA book, in both gold and MFI has seen an improvement, but there is some very marginal increase in SMA book for retail. So I just wanted to understand if you can show -- throw any color with respect to bounce rate or anything, what we are doing. Any concerns on that, if you can just highlight.

So in terms of it is retail plus other loans. So as you know, we have retail, and then we have close to INR 890 crores of lending to NBFCs. Retail book has been behaving extremely well. And as you can see, even the NPA figures, SMA figures, they are completely under control. Where we have had in the NBFC book is that there is 1 account called [ HELLA Infra ] where it has slipped into SMA 1 in the last quarter. And while we are negotiating with them, and we are as of now hopeful that we'll be able to get it under control before the quarter end.

Sir, can you quantify that amount, sir, in that account?

That is roughly about INR 40 crores also.

The next question comes from the line of Varun Dubey from Share India Securities.

Sir, just wanted to understand one thing. I think in the initial remarks, I have heard that the company is expecting to turn the ROA positive in FY '26. Am I right?

Yes. I was telling about positive quarterly ROA in FY '26.

So when do you expect that? Will it be in Q3 or Q4, any time line?

We are working towards [indiscernible] in Q3, if not happening in Q3, definitely in Q4.

Okay. Sir, my other question is on gold loan. I mean just wanted to understand what percentage of your total loan book would be coming from gold loan in coming quarter or FY '27 because that is one business that the company is scaling. And also on the yield part because I was looking at your yield, it is around 13%, 14%, the gold loan speaking about because for many companies in gold loan business have seen the yields going up to 17%, 18%. So what is stopping ESAF to generate that yield in gold loan...

Okay. Varun, I'll take your second question first in terms of increasing the yields on that. Actually, nothing is preventing us from it. But over the last 3, 4 years, we have steadily built up this book. And currently, it's in the region of about INR 8,000 crores or so. And if you see our yields from the gold loan portfolio used to be about 11%, 11.5%, which we have now brought up close to 13.5%. So over the period of time, we will steadily increase it. And we definitely see the potential to increase also. However, we will do it slowly and bring up the yields up to -- I don't want to say a figure, but definitely far more than what we have currently. This is one part of it. In terms of share of gold loans?

39%...

Yes, it's 39% as of now. And we see it at about 40 -- in the region of about 40% going forward.

And the current lending rate for gold is 15%.

The incremental gold loan rate for this quarter, you're right, 15%.

Yes, incremental gold loan is 15%.

The next question comes from the line of Vishant Patidar from Edelweiss Life Insurance.

I have just 2 questions. So one question is regarding the current MFI exposure in Kerala and Tamil Nadu. So what's the ground reality on these states about the recoveries and collection efficiencies? And the second thing is what is our target of comfortable credit cost in next few quarters? And are you planning to be a PAT positive in upcoming quarters?

In terms of credit cost, what we are seeing is in the region of about 4% would be on a steady-state basis, looking at the industry trends. So that is what we can say roughly what we see ahead. In terms of stress in Kerala and Tamil Nadu, Kerala definitely has been coming down. The stress has -- we are seeing a major uptick in that. And that is why we have had the confidence to start lending again with the guardrails in place. In terms of Tamil Nadu, Tamil Nadu is actually where we have the bigger stress book as of date. Tamil Nadu and Kerala, in fact, are the -- I mean, the Karnataka are the 2 big states over there. In both states, we have been very, very careful in terms of increasing the book. The good thing is that Karnataka, as you know, there was a bit of a political dimension to the problem. In the last 3 months, our control over that portfolio has definitely improved. And we are seeing loans which had been delinquent starting to repay again. So what we see is that there will be definitely a good progress in Karnataka over the next few months. In terms of Tamil Nadu, we are still progressing very carefully. Within good quality accounts, we are definitely lending. Otherwise, the focus is mainly in terms of recovery.

Okay. And sir, any bottom line expectation at the end of the year?

Yes, that I have already indicated a positive ROA we are looking for Q3, if not in Q3, then Q4.

The next question comes from the line of Vidhi Vora from [ SAS ] Capital.

Am I audible?

Yes.

So my question is that are you seeing any early stress in specific geographies or product categories, especially in the micro loan or MSME portfolios?

Did you say early stress?

Yes, early stress.

Okay. I will answer it in a slightly different way. As you know, the microfinance portfolio had stress what we had lent in 2022, '23, et cetera. But if I take what we did in 2024, let's say, take the month of July 2024 onwards, so we are now at about 15 months or so. We have lent close to INR 6,000 crores or so. We have disbursed INR 6,000 crores or so over that 15-month period. And as of now, the outstanding book is in the region of INR 4,000 crores. As of now, what we are seeing in terms of stress or let me put it in terms of NPA is roughly about 2-point-something percent of what we disbursed way back in June '24. So what I can say is the new book is behaving according to what a traditional microfinance book would have behaved. And we are not really seeing any early stress in that book.

Okay. Okay. And as we know that Kerala continues to have the largest deposit base. So are there any plans to deepen the penetration in other states to reduce the regional concentration risk we have?

Most definitely. The good thing is that if you've been watching the bank, we have steadily brought down the share of Kerala. This is what I can say. And in fact, Tamil Nadu, Karnataka, they have all been increasing the book. In fact, this time when you see the fifth largest book is in Delhi. So we definitely have plans in terms of increasing the liability base also outside Kerala, and it is slowly coming into play. In terms of the branch network also, roughly 500 branches or 550 branches are outside Kerala. So that network will definitely start showing results.

The next question comes from the line of Maitri Shah from Sapphire Capital.

Am I audible?

Yes.

Yes. So you mentioned the 3 things. Firstly on OpEx that we would like to reach to a 60% to 65% range. And then positively, we would want to turn ROA by quarter 3 or quarter 4 and then reduce the credit cost to 4% of the range. Could you specify any drivers of how we lead to these turnarounds in our metrics going forward?

Yes. Drivers are on both fronts, that is net interest income as well as on the other income. OpEx level, yes, there is a moderation happening on the OpEx level aspect. On the net interest income, as I mentioned earlier, the deposit rates, we have rationalized some time back and the repricing of the time deposit is happening on a day-to-day basis. A partial benefit has already been come into our books and a substantial portion in the coming months, it will get benefited. And on the asset side, as MD as well as Mr. Hari explained, the rationalization of pricing on the asset side also is happening, especially on the gold loan book, even though the average rate is 13.5%, the incremental rate is much above that. So going forward, the NIM, definitely, there will be an improvement. And also the disbursements also has been increased. So the processing fee, et cetera, on the other income side also, we will get a substantial increase. So these are the drivers based on which we have given the statements.

Okay. And any sort of guidance could you give on FY '27 and what sort of loan book growth do we anticipate and also disbursement growth that we are looking forward to and any ROA or ROE targets that we have?

Directionally, our ROA, ROE target is 2% and 20%, which is at this moment, 27%, we are not so definite of achieving at that level, but definitely, there will be positive ROAs and the glide path will be there to achieve that.

And on the loan book growth and disbursement...

Book growth will be somewhere around 20 to 25 percentage on a Y-o-Y basis.

And do we expect most of it happening from the secured side? Or are we expecting our unsecured to also in the same proportion?

On the unsecured side, for the current year guidance, we have given a 35 percentage and it may moderate to around 30 percentage level.

So by FY '27, we expect it to moderate to 30%. That's what we are saying.

Yes, hopefully, by '27, yes.

Okay. And on the GNP and NNPA, how do we see those lowering in the coming quarters?

Definitely, GNPA and NNPA will come down, which is already observed in the SMA levels the moderation, which is already there in the presentation as well. So over a 1-year period, it has halved. And going forward, the stress level at the micro banking level also is fading out. And therefore, we expect that substantial improvement on the GNPA and net NPA will be -- that also will be the driver for attaining the ROA.

The next question comes from the line of Vivek Gupta from Star Investments.

Am I audible?

Yes.

Sir, the CASA growth has been healthy at 13.7% year-on-year, like with a ratio of 26.4%. So what initiatives are being taken to further improve this CASA share?

Well, it is -- one is that, as I was speaking, we have 880 branches or so. So as those branches start increasing momentum in terms of customer acquisition, that definitely helps in improving the CASA book. The second thing is that we have 2 or 3 segments we concentrate on. One is the senior citizen segment. The other is the NR segment, both of which are excellent sources for CASA growth. Apart from this, we have introduced a few things, including we've taken a QR handle, then we have tied up with various, what do you say, agencies to improve payment systems and things like that, which we'll see more in terms of funds flows through the accounts. So customer acquisition concentrating on 2 or 3 segments and certain products which we are offering, these are 3 or 4 drivers which will help us to keep the CASA growth momentum going.

Okay. Okay. So sir, with the cost of deposits reducing slightly to 7. 2%, do you expect this downtrend to continue? Or will competitive pressure limit further decline?

Immediate revision on deposit rates, we are not envisaging because, as you know, the industry growth itself is only 10 percentage as far as deposits are concerned. But however, we have already moderated the deposit rates, the benefit of which will be flowing in the coming quarters.

The next question comes from the line of Riya Jain from HDA Finance.

So I wanted to understand a bit of a macro perspective of the industry. So how do you view the overall outlook for the small finance banking sector in the near term? And could you share your guidance or key focus areas for ESAF Bank for the upcoming quarter?

Okay. So small finance banks have been created to serve the underserved segments and the low and middle income segments of the country. And that segment is very promising, large 70% of our Indian adult population belongs to the low and middle income segments. And as the country is now talking about creating larger banks at the global -- to be part of the global ranking. So there will be a lot of opportunity for smaller banks like small finance bank category. So I see a very good opportunity for small finance bank in general because especially its presence in the rural and semi-urban areas, too, because in the -- a lot of economic activities are happening, industries are moving to the small towns of India. So we definitely believe that small banks are going to play an important role in India becoming a $5 trillion economy or becoming a Viksit Bharat by 2047. Coming to ESAF Small Finance Bank, we are well placed to leverage these opportunities. We have 70% of our branches are in rural and semi-urban areas. We have a large -- apart from our 788 branches spread across 26 states, we have 1,100 customer service centers operating -- operated by our business partners, business correspondents. They are -- most of them are in rural small towns of India, small places. So we see a lot of opportunity to leverage the franchise already we have established. And also, we have developed -- over a period of time, we have developed teams and products and processes are in place to -- for serving the farming community, agri segment and MSME segments. So we'll be more focusing on these segments, the MSME, the agri and mortgage and mobility, these products apart from our micro asset categories, products like micro enterprise loan, products and all. So this is our overall scope we see.

The next question comes from the line of Ashlesh Sonje from Kotak Securities.

Sir, firstly, a few questions on microfinance. If you can share the segmental slippages in microfinance for this quarter? And what is the current bucket collection efficiency in that business? As on September or the entire second quarter, whatever you have available?

Just one moment. So in terms of -- what do you say, micro loans, and let me clarify the question, you're asking about SMA, right?

If you can give the slippages in microfinance.

Yes. Let me first take the thing of NPA or how much the NPA has behaved over the last quarter or so. I'll split this into 2 books. If you were in the call earlier, I was speaking about how the disbursements we've been done -- doing since June 2024, how they have behaved. So since 2024 June, we disbursed about INR 6,000-odd crores in microfinance. Out of that, currently, there's about INR 4,000-odd outstanding and the NPA there is about INR 189 crores or so. So if you see -- look at the figure of actual disbursements to what is the NPA today, it is around 2-point-something percent. So that gives a flavor of how the book has been behaving and what the kind of slippages have been over the last 15 months. I'm not talking of this quarter, but 15 months. And that is how we are fairly confident that we are able to manage the new book pretty well. So the slippages that you are seeing earlier in terms of -- in this quarter, whatever slippages happened is primarily because of the books which we lent in 2022 and '23. So that is the problem area which we are facing. And there, we are seeing in terms of total incremental NPA, it's about INR 144 crores, which is decline. And in addition to Mr. Hari, it's not the major slippage happens in the Karnataka, and Tamil Nadu. And -- but we see a very positive slippage coming down in Karnataka when compared to 6 months back. And Tamil Nadu also in stable phase as mentioned by our MD.

Understood. So out of this INR 340 crores total slippages this quarter, you said INR 140 crores has come from microfinance. Is that fair?

No, no, no. It's INR 255 crores is the slippage, which has come out of the INR 340 crores. Yes.

Understood, sir. Okay. Sir, and secondly, how easy or difficult is it today to hire employees for the microfinance business because you are planning to increase the disbursements over there?

Well, it is like this. The dependency on employees, I would say it is there, but it is coming down. What we see is that about 40% of our repayments are coming in terms of digital repayments, where customers are paying into their loan accounts using a GPay or some other payment modes. So to that extent, dependency on employees is coming down in terms of seeing the customers personally. But definitely, hiring, there will be a challenge. What we see is going forward, we will have to look at the model of the current last 3, 4 years, whatever traditionally the industry has been following. We may have to look at empowering them as agents. And I'm not committing this on behalf of the bank. Since you asked in terms of a view, this is a general view of the industry that I'm saying. We may have to see that instead of employees, we have agents. So agents who typically get some income in terms of commission, we give them various opportunities. Again, it's an example only and not a commitment. A bank can do various things. They can source other loans. They can source SB deposits. They can source fixed deposits. There are a variety of things that an agent can do. So as individuals, and this is part of the regulatory framework, which is allowed also. So going forward, as an industry, we feel that is the direction in which it will be moving.

Understood, sir. Sir, and if I look at your microfinance disbursements, you have definitely seen a quarter-on-quarter inch up. But if I look at FY '24, you were running at a run rate of about INR 3,000 crores to INR 4,000 crores per quarter. Where do you think you can end up now going ahead?

We will assess this very, very carefully. I can tell you what we have done. What we have done is we have -- until, let us say, July 2025, we were collecting more than we disbursed. Since July, that is from August onwards, our disbursements have exceeded the repayments. So we will be very, very careful. We will be very choosy in whom we lend. However, where there is opportunity to lend and where the quality is good, we will definitely do it. So I think in the earlier conversations which we had in this call itself, we've been indicating that we see microfinance at about 30% to 35% of our book. We will keep it there in a very clean, healthy way. So if INR 600 crores, I think over the last 3 months or so, the average disbursement we've been doing is about INR 630 crores. We may -- looking at the quality, we may increase that a little bit more. However, it will not be like the earlier days when you were speaking about INR 4,000 crores, INR 5,000 crores every quarter, et cetera. That will not happen.

Understood. Sir, and just last question. Can you share the average cost of savings deposits and average cost of term deposits for you?

The average cost of savings deposits is about 5.1%. And the average cost of fixed deposits is about 8% or so. However, if you see from a cost of funds point of view, last year, the whole 4 quarters, we were at 7.5%. This year, we've come down to 7.4% and current -- last quarter, it was 7.3%. So we've been rationalizing the deposit rates. And as you know, deposit rates take a far longer time to show the kind of cost of funds change. However, I think the CFO, Gireesh, has already mentioned, we see it moderating over the next 12 months.

Understood, sir. Sir, you said cost of [ SA ] is 5.1%. Is that right?

That is right.

As there are no further questions, this brings the conference to an end. On behalf of ESAF Small Finance Bank Limited, we thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.