Are you looking for a fixed-income investment that offers a high, regular return? ESAF Small Finance Bank (SFB) has launched a public issue of Non-Convertible Debentures (NCDs) with an attractive 11.30% per annum coupon rate, paid quarterly.
But what exactly are you investing in? This blog breaks down the technical details of the ESAF NCD into simple language, helping you understand the potential rewards and the associated risks.
At a Glance: Key Features of the ESAF NCD
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Face Value: ₹ 1,00,000 per bond
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Coupon Rate: 11.30% per annum (paid quarterly)
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Effective Yield: ~11.79% per annum
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Tenure: Approximately 6 years (Matures on May 14, 2031)
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Rating: ‘CARE A’ with a ‘Negative’ Outlook
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Redemption: Bullet payment (you get the entire principal back at maturity)
What is an NCD? In Simple Terms
Think of an NCD as an IOU (I Owe You) from a company. You lend them a certain amount of money for a fixed period. In return, they promise to pay you regular interest (the “coupon”) and return the full principal amount on a specific maturity date. It’s a classic fixed-income product.
Decoding the Technical Jargon: What Makes This NCD Special?
The ESAF NCD is described as a “Subordinated, Basel II Compliant Lower Tier II Capital” bond. This sounds complex, but it’s crucial to understand.
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Subordinated Debt: This means if the bank faces financial trouble and is liquidated, the holders of these NCDs will be paid after all senior debt holders (like depositors and other lenders) are paid. This adds a layer of risk, which is why the bank offers a higher interest rate to compensate investors.
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Basel II Compliant Lower Tier II Capital: This is a regulatory feature. Banks are required to maintain a certain level of capital as a safety cushion. This NCD qualifies as part of that cushion under the older Basel II rules. This is a key differentiator from newer “Basel III” bonds, which can have complex triggers that might force a loss or conversion into equity. This NCD has no such triggers, making its structure simpler and potentially less risky for the retail investor in a going concern scenario.
Why Consider the ESAF SFB NCD?
1. High and Regular Income
An 11.30% quarterly payout is significantly higher than most fixed deposits and savings accounts, providing a steady income stream.
2. Listed on Stock Exchanges
The NCDs will be listed, providing you with an exit option before maturity if you need to sell them. However, the market price may be higher or lower than your purchase price.
3. Strong Operational Foundation of the Bank
ESAF SFB isn’t a new entity. It’s a scheduled commercial bank with:
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A Large Network: 788 banking outlets and over 8,277 customer touchpoints across 26 states and union territories.
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A Growing Customer Base: Serving nearly 96 lakh (9.6 million) customers.
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Diversifying Portfolio: The bank has successfully reduced its reliance on microfinance (from 81% in 2022 to 46% in 2025) and grown its secured loan portfolio, like Gold Loans (now 34% of the book). This reduces overall risk.
What are the Risks? A Balanced View
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Credit Risk (Default Risk): The ‘CARE A’ rating indicates adequate safety, but the ‘Negative’ outlook means the rating could be downgraded if the bank’s performance, particularly its asset quality, deteriorates further.
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Subordination Risk: As explained, your claim on assets is subordinate to other creditors.
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Interest Rate Risk: If overall market interest rates rise, the market value of your existing NCD could fall.
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Asset Quality Concerns: The bank’s Gross NPA (Non-Performing Assets) is high at 7.5% (as of June 2025), indicating a significant portion of its loans are under stress. This is the primary reason for the negative outlook and recent losses.
Important Note: The bank has reported losses in recent quarters (Q1 FY26: -₹81 Cr, FY25: -₹521 Cr). While there are signs of improvement (reducing credit costs and operating expenses), investors must be cautious and aware of the bank’s financial health.
Who is this NCD For?
This NCD is suitable for savvy investors who:
- Are seeking high regular income.
- Understand and are comfortable with the risks associated with subordinated debt and a ‘A’ rated instrument.
- Have a diversified portfolio and can allocate a portion to higher-yield, higher-risk fixed income.
- Are investing for the long term (~6 years).
Final Verdict
The ESAF SFB NCD offers a very attractive coupon of 11.30% in a market hungry for yield. Its Basel-II compliant structure is a positive for investors wary of the complex triggers in newer bonds.
However, the investment comes with clear risks, primarily reflected in the bank’s high NPAs, recent losses, and the ‘Negative’ rating outlook. This NCD is not a substitute for a bank FD for risk-averse investors.
Do your due diligence. Carefully read the issuer’s offer documents and understand the risks before investing.
🔔 Interested in the ESAF SFB NCD offering an 11.30% p.a. return? Our financial experts can guide you through the application process and help you assess if it aligns with your portfolio goals.
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Disclaimer: This blog post is for informational purposes only and does not constitute investment advice. Please consult with a qualified financial advisor before making any investment decisions. Investments in debt securities are subject to risks, including delay or default in payment.
