Operator
Ladies and gentlemen, good day, and welcome to ESAF Small Finance Bank Q2FY27 Earning Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. K. Paul, the Managing Director and the CEO. Thank you, and over to you, Mr. Paul.
Thank you, and good afternoon, everyone. We welcome you to the Q2FI27 earnings call of ASA Small Finance Bank. Joining me today are my colleagues, Mr. Josh K. John, Executive Director, and Mr. Girish CP, EVP and CFO. I would like to begin by highlighting a significant achievement for the bank this week, the successful implementation of ISAF 2-0, our flagship digital and IT transformation program. Start our next. This marks an important milestone in ISAF Small Finance Bank's transformation journey and reflects our commitment to building a future-ready, technology-enabled bank. The successful implementation has strengthened our technology backbone and established a more scalable and resilient platform for the bank's future growth. Investment to enhance operational efficiency, productivity, automation, and customer experience, while strengthening risk management and control mechanisms is a key enabler of business scalable banking network. We believe this modern technology foundation will position the bank to pursue its long-term growth ambitions. More on the court, my sincere appreciation for our employees, especially our activity director, Mr. George K. John, who also, these strategic transformation partners, this is an important milestone for his staff, providing a strong technological foundation to support our next phase of transformation and sustainable growth. Our transformation journey continues with the Mark portfolio as the key anchor supported with the renewed focus on the emerging household loan category. While emerging household portfolios have become more than doubled as compared to last year, The Mark portfolio has maintained its steady growth rate every quarter. The growth is not dependent on any individual segment but is broad based with all the constituent segments of Mark and EH showing strong growth both on YOY and quarter to quarter basis. Mark portfolio continues to maintain lower delinquencies, but complementing it with the EH portfolio comprising of customers with an established repayment track record and growing income profiles has helped us in further improving our asset quality. Our financial performance has improved significantly and continued its positive trend on the back of our strategic transformation and focus on operating efficiency. Our objective is to build a well-diversified retail franchise with secure lending, emerging outsourced, microfinance, and deposit complementing each other. This will be further supported with continued investments in technology and innovation to deepen customer engagement and provide best-in-class facilities to customers. We will continue to build on the strength of our network. Majorly, products have been built, diversified, and resilient asset-based that is supported by discipline and execution, investment in technology. At the same time, the bank has established itself as a front-runner in integrating environmental and social stewardship into its core business operations. In its strategic projects, the bank actively promotes sustainability and social well-being across the communities. The ESG rating has improved from 75.4% in all three aspects of environmental, social, and governance. Thus, reflecting our continued progress towards responsible and sustainable growth. On the macro front, the Indian economy appears to be resilient. Though the RBI raised its FI27 GDP growth forecast to 7.1% in the latest MBC meeting, it also increased the repo rate by 25 basis point, with a shift to calibrated tightening as inflationary pressures persist. We are cautious and watchful for the increased volatility in global energy prices, and the pulse has not had any material impact on our business or diversification, and improved financial parameters gives us confidence that we are moving in the right direction with regards to people, technology, systems, asset quality, and risk management for our next phase of growth. I now invite our Executive Director, Mr. George K. John, to take you through the next session.
Thank you, Professor, and good afternoon, everyone. During the quarter, improvement across key parameters continued sequentially, including improved profitability and asset quality metrics, coupled by normalization and shortages, and better operating efficiency. Thanks. As of September 30th, 2026, a thousand customers stood at 22,399 crores, registering a healthy year-on-year growth of 25 crores compared to 40,031 crores of last year. During the same period, the growth of growth grew by 25 crores, while the growth increased by 24 crores, reflecting balance growth across both sides of the balance sheet. If you add IEPC transactions done during the quarter, our total business stands at 53,449 posts. Total deposits grew by 24 posts, which retain deposits remain strong at 90% of total deposits, while carers stood at 23.3 posts. Our liquidity coverage ratio stood at 141.48 posts as of September 2016, indicating a comfortable liquidity position. Our legacy strategy remains centered on granular retail deposits and our strategically deepened customer relationships. As a result, our retail deposits have gross amounts of 25,000 crores. This total gross advances grew by 25% worldwide. Secure non-book grew faster at 25% worldwide. Whereas, the unsecured long group consisting of micro-france businesses grew by 15% worldwide. Secured businesses now stand at 54% of the total gross advances. An improvement in portfolio links towards secure assets and an improved collection efficiency is driving improvement in asset quality. The Secure Book is driven largely by the Mark Portfolio, as it represents our strategy to increase Secure Retail Lending. In Q2, FY27, at 13,930 crores, the Mark Portfolio has grown by 30% YAOI and constitutes 58 crores of the total portfolio. This quarter, a negative constituent of mark, that is, the golden portfolio, grossed 10,000 gross in gross allowance to reach 10,000 gross. Portfolio quality is good and remains stable with G&B at 0.1%. We show strong growth in all other constituents also, grown by its effective execution and tailored offerings. Agri, Gold, Mortgage, and Retail continue their strong performance, with Y-O-I growth of C-C-Dix, 39, 39, and 34%, as mentioned in the last quarter, our new focus on emerging household segments is repaying good dividends. While FIG has remained stable, the individual and enterprise portfolio is evolving rapidly with strong YOY and sequential growth. Also, emerging household loans consist of disbursements to customers who are difficult individuals and small entrepreneurs, progressing beyond traditional microfinance and who have a good repayment history. Hence, the portfolio quality is good and significantly improves the advance overall of its quality. Microfrance loan portfolio comprising of group loan sites de-governed by 65% YAY, but the decline in this portfolio is a land-width of a transit direction. Rather than forbidding customer relations, we are progressing eligible borrowers to individual and secure lending relationships under the emerging household portfolio. We are adopting a calibrated approach to a microfinch portfolio and are comfortable with our current portfolio size, as we aim to preserve yield and reduce mortality. During the quarter, we added 10 new banking outlets, and now our distribution footprint stands at a total of 831 banking outlets, 1022 ATMs, 1050 customer service centers, and 31 institutional business correspondents across 24 states and 21 territories, enabling these customer reach and connect. We have already mentioned the last couple of calls about ISAF 200 Startness Project, which is a key static, digital, and IT transformation program. I am pleased to share that these small-sized banks successfully went live with Stateness Project on 26 October 2026, marking a major milestone in a technology transformation journey. The implementation involved migrating to Oracle First Cube as our core-bound system, alongside the deployment of upgraded business applications and their modernized technology infrastructure. GoLive, our focus is on stabilizing operations, ensuring transaction accuracy, strengthening system performance, and supporting employees and customers through the transaction. Teams are working closely with technology partners to monitor operations and address emerging issues on priority. From a strategic perspective, StartMOS is much more than a core banking migration. It represents a foundational investment in the bank's future operational operating model. The new technology environment is designed to support latest scalability, improved automation, stronger operational controls, and enhanced digital capabilities. It will also support our ongoing business transformation, including portfolio diversification, The expansion of sector lending, improved productivity, and the strategic growth of our banking network. While the benefits will be realized progressively, as the platform stabilizers and business processes are further optimized, we believe this investment provides an important technology foundation for the banks' sustainable growth over the coming decades. We remain committed to building a stronger, more resilient, and future-ready ESOP more chance bank. As we move into the second half of FY27, we will continue to further strengthen our secure lending franchises through a mark and grow the emerging also segment, maintaining a fine balance between growth and asset quality. Also, our investments under ESO200 will enhance business growth, productivity, and customer experience, just creating a stronger foundation for the future. The improvements in asset quality and profitability that we have witnessed now reflect the structural changes we undertook over the last two years, and this transformation is continuous.
Thank you, sir. Good afternoon, everyone. I thank all the participants for taking time for joining us on the training school. Let me give you an overview of our financial performance highlights for Q2 FY27. As of Q2 FY27, capital deposits stood at 28,466 crores, growing 24% compared to 22,894 crores last year, with a healthy CD ratio of 82%. Retail deposit increased to 25,475 growth, registering a growth of 15% YOY, which now constitute 89% of the total deposits. Our retail deposits reflect a stable and granular deposit base, which we will continue to build further. Additionally, we are also seeing good traction on our non-resident deposit base, witnessing steady sequential growth for last five quarters. CASA deposits grew at lower pace than 10 deposits to 6,645 crores in Q2-FI-27, registering a 10% YOY growth, with the CASA ratio standing at 23.3%. We are formulating various measures for prioritizing quality CASA acquisition and focusing more on NPB, NR, and task relationships to achieve the targeted CASA level by end of the year. Gross advances increased to 23,934 crore from 19,137 crore a year ago, registering a growth of 25% YOY. Our strategic priority of diversifying the loan book remains on track. The secured portfolio stood at 15,377 crore with a growth of 32% YOY, Whereas, the unsecured portfolio stood at 8,557 crores with a growth of 15% YOY aligned with our strategy. Healthy asset growth, moderated NPA levels, strategic product mix, and appropriate pricing strategy translated into strong revenue momentum with total interest income reaching 1,175 crores and the net interest income increasing by 73% YOY to 643 crores. Other income for the partner also grew by 47% YOY thanks to increased business volumes. Yield on advances continue to be in a comfortable zone, with cost of funds remained largely stable in Q2 FI27, leading to net interest margin at 8.2%. The funding cost is expected to marginally go up in Q3, but have enough cushion to absorb the current NIM levels. Lower slippages, primarily for unsecured, will continue to support margins, but any further upward changes in policy rate may lead to higher interest expenses affecting the NIMS. Pre-provisioning operating profit for the quarter of 362 crore is up 289% YOY. The improvement in PPPP is expected to remain stable in H2 also. Operating expenses in Q2, FY27 increased by 2% UO2 largely due to other objects which grew by 4% whereas employee expenses remained flat. Cost-to-income ratios stood at 38% as compared to 82% in Q2 last year. We will continue to focus on further improving operating efficiency and optimize overhead costs for the remaining year as well. The operating expenses are within comfort levels and have remained range-bound sequentially. Considering the incremental offers towards technology and branch network build-up for planned lines, we aim to maintain cost-in-time ratio around 60% for the year. The normalization of asset quality issue in the MFI sector and the change in portfolio mix has led to improvement in asset quality and lower flippages. As compared to Q2FI26, the growth in PA for Q2FI27 declined significantly to 2.8% from 8.5% and net NPA declined to 0.3% from 3.8%, While flip-pages reduced sharply to 87 crores from 342 crores on a YOY basis. Total technical writer for the quarter was 626 crores, probably the last load from the legacy NPA. With flip-pages well under control, credit cost on annualized basis has reduced to 2.6%. We estimate the same to remain in the range of 2% for the full year. Our gross leverage ratio for Q2FI27 on an annualized basis stand reduced to 1.6% and is expected to have the same trend in the remaining fiscal. Q2FI27, FAT has been doubled sequentially to reach 160 crores from 80 crores in the previous quarter. ROA and ROE are reaching normalized levels and stood at 1.5% and 26.5% respectively on an annualized basis. We are taking steps to optimize capital consumption and have seen PRIR improvement by 20 basis point to 24.1 percentage as of September 26. As business volumes grow and operating leverage from our distribution network flows in, further improvement in the return ratios are expected going forward. We believe that a strong hedge fund will support H2 as well through a diversified asset book, discipline underwriting, and improved operational efficiency, enabling net income growth, optimized cost ratios, favorable NIMS, and NPA movement. However, we remain vigilant on the global tensions, revised monetary stance by RBI, supply chain disruptions amid geopolitical tensions and the recent weather-related issues. Our continued focus on profitable growth, discipline, risk management, operational excellence, and customer-centric innovation will be further boosted with the successful implementation of our new technology platform. The investments made are a strong foundation for a resilient balance sheet and profitable growth going forward. Thank you very much. And now the floor is open for Q&A session.
Operator
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Amit Mehendale from Rovo Capital. Please go ahead.
Thank you. So my first question is on the, you know, this quarter, our loan book, you know, has grown 3% sequentially, like quarter on quarter 3%. But the NIA growth is about 10%. So, can you please explain the reason for higher NIA growth?
See, it is on the effect mix as well as, you know, last year there were NPAs on which the indirect income was unable to be recognized. So, managing NPAs has, you know, released the income recognition in full level.
Right, sir. So, was it also part of, because there was an NPA write-off, so there was an interest component that was, I mean, was there any release in that line item, provision release or any interest release?
No, as far as the technical write-off is concerned, that is, principal versus provision, which is already taken, T&L hit. There is absolutely no component for the income reversal under that.
Right, sir. And this quarter, you know, continuing on the quarter-on-quarter growth, as the growth is slightly moderate at 3%, so do you still expect, say, 20% type of growth, you know, next year, like FI28?
No, this quarter growth was moderated because, as we mentioned, we were focusing on the migration, so that took some attention of the team. So that is why the growth was a little moderated, but by 528, we expect that the earlier growth projection will continue. But on a value-value basis, we have grown 25%.
Right, sir. And on the other income, how much is the insurance income either quarterly or for last year? I mean, is there any impact? Do you see any impact of the insurance, the revised guidelines on the profitability of the P&N?
Can you quantify the impact?
Yeah, for the current quarter, the insurance contribution is 25 crores, and, you know, the draft case only is, you know, now released, and we all have given our suggestions on the new, you know, proposals which was given by IRBA on the draft proposal. Let us see the final proposal and take the complete impact on that. In case, you know, the drastic reduction comes in, then we will, alternate arrangements will be made for increasing the other income portfolio.
What was the insurance income for last year, like FY26 full year?
124 pros for the full year.
And the last question is, you know, in the earlier calls, there was a discussion that any capital raise, So, effectively, future capital rates will happen closer to the valuation multiples of IPO. So, are we still maintaining that, given that IPO, you know, valuation was closer to maybe 1.4, 1.5 times book? Are we still maintaining that, you know, expectation?
See, the bank has taken a decision to infuse capital to the extent of, you know, 1,000 crores or so, but on the valuation trend, we are yet to take a call on that.
I couldn't hear that properly. Can you repeat what was the first part of the answer?
See, as of now, we have a capital adequacy ratio of 24%, so there is no urgent need for capital raise. However, we are open for a strategic capital infusion. We are exploring those options. Thanks. So, and that too, also we have raised, the first quarter we have raised, it will come closer to the discussions only.
So, maybe next two quarters, no, I mean, equity capital raises, is that fair to say? Till March end, it may not happen.
We have, as of now, we have not taken any concrete decisions for capital infusion, but that doesn't mean that we will not raise capital during this current year.
Right, sir. And my last, you know, one last thing, on the credit cost, could you provide some guidance for FR28?
Credit cost asks us now, you know, 2.6 is the annualized for the current quarter, but around 2% is what is expected for the full year, as things stand today. So, sir, I'm asking for next year. Next year. Next year, again, you know, all the backlogs have already been cleared. We hope that 1.5 will be a good guess.
Okay, sir. Thank you. That's it for mine. Thank you very much.
Thank you, Amin. Thank you.
Operator
Thank you. A reminder to all the participants that you may press star and want to ask a question. The next question comes from the line of Deepak Odhar from Sapphire Capital. Please go ahead.
I'm audible, sir. Yeah, thank you very much, sir, for this opportunity, and many congratulations for a good set of numbers. So, just wanted to understand first up on the ROA front. I mean, earlier we were looking at ROA of 2% by year end. Now, we have achieved in this quarter itself. So, how should one look at your ROA for entire year, FY27 and FY28? Sir, your voice is correct. So, you are saying 2% ROA for FI27 entire year, right? Okay, understood. And what about next year, FI28? And geographically, can you throw some more light? I mean, is there any pocket or micro markets where you are finding any kind of issue? I mean, just some flavor on the market side. So, that would be very helpful.
See, generally, we are not finding any mental issues in any of the markets we operate, but in Maharashtra, Karnataka, some of these markets, the drought situation is a little bit affecting. The SLBC and the government is issuing some laden on them. So, we are very cautiously watching those developments in these markets. So, otherwise, across our markets are performing on the same level.
Okay. Because Maharashtra and Karnataka together forms around 15%, right? 15-16% of our portfolio. So, there, I mean, the payment or X-bucket collection efficiency is 99% plus. I mean, how is the scenario there?
Maharashtra, the portfolio is performing well.
Yeah, as of now, it does not impact much on the collections, but we expect if the situation continues for the whole of the year, it may have an impact.
Clearly, it is performing well, but if the situation persists, then we might see some issue, right? Yes, yes. And in terms of cost to income, did we say that this year we are looking at 60% kind of a cost to income?
Yeah, that is the cadence which we have given. So, 67.5% is the current level. So, we expect that it may be around 60% each.
6-0, right? 6-0, yes. So, why are you expecting cost to increase?
Because, you know, as we were explaining, the stratonic expenditure capitalization will happen now. So, for the next half year, there will be, you know, some additional expenditure on account of that.
So, that digital transformation, ESAF 2.0? Yes. So, how much was spent on that? What was the amount we spent on that transformation?
So, for that, we will give you later. The capitalization will have to happen now, because we run live only on Monday, this Monday.
So, I was just trying to understand now, because your cost will increase, but you are still maintaining that your ROA will still be at 2%. So, what are the factors that you can cite which will kind of offset this increase in cost? I mean, NIMS, you are maintaining the NIMS, and cost you will increase. So, what will help us maintain that 2% R-way for this year, for the second half?
Yeah, the thing is that, you know, if you see the PPOP, it is on a steady-state basis now. And the split wages are very much under control, and the provisioning, almost it is done. The leftover NPA is only to the extent of 80 crores. So, on the provisioning front, we will get the cushion.
So, so, so, so, credit cost will kind of, will help you, right? To, to kind of offset the cost increase and help you maintain that 2% ROI.
That, that's very helpful, sir. I mean, I would like to wish you all the best. That would be my side. Thank you. Thank you.
Operator
Thank you. A reminder to all the participants that you may press star and want to ask a question. The next question comes from the line of Raj Shah from Fident Asset Management. Please go ahead.
Hi, thank you for the opportunity and congratulations on a great set of numbers. I wanted to understand in the gold loan portfolio, there is some rise in SMA 0 and SMA 1. And what was the reason it was? Was it because, I mean, the temporary drop in gold prices that caused this? And how do you see this slowing down to the further buckets going forward?
Yeah, there is a spike in SMA 0 and SMA 1. This is primarily because of, you know, the gold price fluctuation in the market. Some of the, you know, the customers who require some more time for, you know, rolling over the loans, etc. And that is the reason.
So, you don't expect any major flow through to downward buckets going forward, right? From these, I mean, majority of which will eventually get recovered.
Yes, definitely it will get recovered. And the price level, some kind of stabilization has come after the fluctuation, which was rampant during the September and, you know, the beginning of October.
So, out of this 1,080 crores of SMA0 and around 250 crores of SMA1 in the retail, the gold and retail segment have reported, how much would have been recovered till now?
Gold is somewhere around 990 crores in SMA0 and 200 crores in SMA1.
Okay, I understand. Okay. And secondly, sir, you said that you are expecting around 2% credit cost for the full year. So, I mean, incrementally for the next two quarters, trade cost looks, optimally looks very low. I mean, it goes to around 40-50 kilos. So, is that understanding correct?
Yeah, definitely. Because, you know, all the backlog provisioning has already been done with. And, you know, the SMF is mounting. Mainly, it is on cold on. And therefore, you know, 100% recovery is expected out of the slip pages, if at all, anything happens.
Understood, understood. And, sir, lastly, in terms of new products, are we looking at any new products going forward in the secured segment, any two-wheeler loans or any other such kind of product?
We are already in the secured segment. We have already introduced many products in the mobility and mortgage segment. So, with the new technology platform, we are planning to accelerate all the products because we have onboarded many new LOS that will help us to accelerate the growth in the retail business, the secured loan business.
Operator
A reminder to all the participants that you may press star and want to ask a question. The next question comes from the line of Amit Mehnzadeh from RoboCapital. Please go ahead.
I just wanted to clarify from the earlier participant. Out of the 1085 crores of SMA0, gold is 900 odd crores, right? And what is the balance portion there?
Balance is spread across the other portfolios. There is no other concentration in any other portfolio. It is spread across all other portfolios, which is quite normal.
Right. On the gold portfolio, what is the LTV for that gold portfolio, average LTV for the entire book of 900 crores?
As of now, it is around 76%.
76% as of now or as of the time of lending?
Right, sir. And those are bullet products or those are monthly products? Yeah, monthly it is bullet only. Sorry, I couldn't hear that. Can I talk about how much is bullet and how much? Mostly bullet only.
Mostly each bullet only. Mostly this bullet only.
Okay, sir. And because, you know, on the earlier discussion on the drought, there is also RBI forbearance. Also, there is recently some SBLC guidance was also issued. So, that I think you can use either of that for restructuring the, you know, if there is any dealing concierge, right? Is my understanding correct? Right?
Yeah, restructuring is permitted, but we don't foresee any kind of major restructuring requirements in our portfolio.
Right. And will you be able to restructure gold portfolio as well on the crop performance?
Generally, no, because, you know, gold loan, it is not given as a crop loan. Right.
Okay, sir, that's it from mine. Thank you.
Operator
Thank you. A reminder to all the participants that you have pressed up and want to ask a question. The next question comes from the line of Diwaka Zana from Prudent Equity. Please go ahead.
Hello. So my question is, what proportion of the market and especially emerging household customers are migrated from MFI borrowers?
There are small percentages of migrated customers, but not all, because it is the mark portfolio consists of MSME, Agri, Retail, and Gold. So, this is mostly there will be graduated MFI customers, but majority will be outside of the MFI customers.
Outside new customer base, right, sir?
Okay. And so, there is a fresh NPA addition of around from 74 crores to 87 crores. So, what was the reason? What are the key drivers of these bridges?
In that, one corporate portfolio also was there to the extent of 7 crores. Otherwise, it is normalized.
I need some more clarification on the SMA that has been due to 1085 CR. So, what was the reason you said on the gold front?
See, on the gold, the price fluctuation was rampant during this quarter, especially in September and October's beginning. The price drop was there, and now it is getting a little bit stabilized. So, we hope that, you know, the SMA portfolio will get cleared once the price stability on the gold price comes in the market.
So, do you expect anything to slip into NPAs from this?
We don't expect any kind of slippages in the world on book, because generally, you know, when the price stability comes, this will get cleared.
Okay, because we are seeing, you know, a lot of big players have shown increasing NPA in the gold portfolio, right?
Yeah, our advantage is that, you know, still we have got only 76 percentage LTV, and we are very, very conservative in fixing the per gram gold rate for the purpose of lending. We don't generally give any top-up loans. Some of the players are giving top-up loans also on the gold loan, which is a risky affair, which we have not resorted.
And sir, how much of the Q2 other income came from PSLC sales and other non-recruiting items?
64. 64. 64 CR. And sir, given the high concentration of deposit in Kerala, what is the plan to diversify the funding base across geographies?
The branch network is now well-diversified. We have presence in 26 states and locations, especially in north, east, and west. So, it is also a function of the market. You operate in that market. So, we are now in these markets for many years. So, over a period of time, we will be able to bring down the concentration in care.
Sir, have you seen any impact of Middle East Eastern war in your deposits, maybe in water remittance that we have from Middle East in the southern part of India?
Absolutely no. In fact, I know the NRI deposit has already increased by 17% in YOY. And we don't have credit exposure to the NRIs. And therefore, on that side also, there is absolutely no problem.
Operator
Thank you. Ladies and gentlemen, as there are no further questions today, we have reached the end of question and answer session. I now hand the conference over to management for closing comments. Over to you.
So, we believe we have taken the right strategic steps and the improved performance validates the fame. So, we will continue with the fame, dedication, and hopefully supported by a positive macroeconomic environment. We can expect to see continued growth. Thank you all for the participation, investors and analysts, for taking the time out for this conference call today. In case you have any follow-up questions or inquiries, you can always reach out to our Investor Relations team. Thank you very much.
Operator
Thank you. On behalf of LRA Securities and ESAF Small Finance Bank, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.
