CareEdge Ratings has downgraded the debt instruments of ESAF Small Finance Bank due to its sustained weakness in asset quality and net losses over the last four consecutive quarters. The rating company has revised down the rating on the bank’s tier-2 bonds to “A-/negative” from “A/negative” and also downgraded the rating on the proposed ₹385 crore lower tier-2 bonds to “A-/negative”. This indicates a low credit risk but not the best risk profile.
The outlook for the bank remains negative, as its profitability and asset quality are likely to remain under pressure in the near term. The bank suffered a net loss of ₹521 crore in FY25 and ₹81 crore in the first quarter of the current fiscal, primarily due to elevated credit costs and interest income reversals. This trend is expected to persist through FY26.
CareEdge has stated that an upgrade is contingent upon additional equity infusion or significant asset quality improvement. The outlook may be revised to ‘stable’ if the company successfully raises substantial equity capital or demonstrates improved asset quality, characterized by a significant reduction in slippage while maintaining a comfortable capital adequacy buffer above regulatory requirements.
In other news, banks are urging the Reserve Bank of India (RBI) to issue fewer long-term bonds in the second half of fiscal year 2026, citing weak demand from insurers and pension funds. The high supply of state bonds and weak demand are pushing borrowing costs up, with the 10-year yield recently increasing. Concerns about GST revenue shortfalls are also contributing to the pressure.
The downgrade of ESAF Small Finance Bank’s debt instruments by CareEdge Ratings reflects the bank’s struggles with asset quality and profitability. The bank’s ability to raise substantial equity capital or improve its asset quality will be crucial in determining its outlook. As a reliable and trusted news source, it is essential to closely monitor the bank’s progress and the overall economic landscape to provide accurate and timely updates.