About ESAF Small Finance Bank Limited

A small finance bank with a focus on unbanked and under-banked customer segments with network of 700 banking outlets (including 59 business correspondent-operated banking outlets), 767 customer service centers (which are operated by our business correspondents), 22 business correspondents, 2,116 banking agents, 525 business facilitators and 559 ATMs spread across 21 states and two union territories, serving 7.15 million customers as at June 30, 2023

Primary products

Advances (asset products): - (a) Micro Loans, which comprises Microfinance Loans and Other Micro Loans; (b) retail loans, which includes gold loans, mortgages, personal loans, and vehicle loans; (c) MSME loans; (d) loans to financial institutions; and (e) agricultural loans.

Deposits (liability products): - Our liability products comprise current accounts, savings accounts, term deposits and recurring deposits.

Services: - safety deposit lockers, foreign currency exchange, giving our customers access to the Bharat Bill Payment System, money transfer services and Aadhaar Seva Kendra services distribution of third-party life and general insurance policies and Government pension products.

The “ESAF” brand was built over 27+ years, beginning in 1995 when ESAF Foundation started its micro loan activities. After acquiring the busine ss of EFHPL, the company has been able to leverage the strength of the “ESAF” brand to grow deposits as a small finance bank on March 10, 2017.

Milestone:

• Successful adoption of e-signatures for Micro Loan disbursals.
• Digital platforms,
• Internet banking portal
• Mobile banking platform
• SMS alerts
• Bill payments
• RuPay branded ATM cum debit cards
• Digitalizing Account opening process.

In order to promote financial inclusion, the Indian banking industry has seen several changes in recent years. NBFCs, such as Bandhan and IDFC, received permission to set up universal banks. Also, a few microfinance companies, a local area banks and an NBFC as well as one urban co-operating bank have received permission to set up small finance banks (SFBs). The RBI awarded SFB licences to 12 players keeping in with the government’s focus on financial inclusion and inclusive banking.

The SFB’ AUM is estimated to have clocked 29% CAGR from March 31, 2018 to June 30, 2023. Top 3 SFBs accounted for ~60% of the aggregate AUM as of June 30, 2023, up from 55% as of March 31, 2017 indicating the rising concentration and expansion of players within the SFBs. In Fiscals 2021 and 2022, new loan origination remained low as SFBs turned cautious and selective in disbursals due to the pandemic. However, as economy revived and business operations normalised, SFBs’ AUM witnessed strong growth post pandemic. As of June 30, 2023, SFB AUM is estimated to have crossed ₹1,900 billion. It is expected that SFB’s AUM to grow at ~22-24% CAGR between June 30, 2023 and March 31, 2025, as most of the SFBs have completed the transition phase and are likely to benefit from their operating leverage.

SFBs have a significant growth potential as most of them were functioning as NBFCs/MFIs previously. Immediately after commencement of their operation, all SFBs focused on increasing their deposit base.

Their overall deposit base doubled to around ₹375 billion as of March 31, 2019. Further, the proportion of CASA deposits is estimated to have shot up from nearly ~20% as of March 31, 2020 to ~36% as of June 30, 2023. The increase could be attributed to the higher interest rates they offer and the increase in their branch network. SFBs’ deposit to grow at 40-45% CAGR over June 2023 and March 2025 as players focus on popularizing convenient banking habits to cover the last mile and widen financial inclusion by deepening their penetration in untapped geographies.

Risk Analysis.

1. The company does not have presence in top 10 states for Microfinance Loans advances under management (Bihar, Uttar Pradesh, West Bengal, Odisha or Rajasthan) and most underpenetrated states (Jammu and Kashmir, Himachal Pradesh, and Manipur).
2. The company is required to maintain a minimum cash reserve ratio & statutory liquidity ratio.
3. non-convertible debentures are listed on Bombay Stock Exchange Limited (BSE)
4. The company faces challenges in our rural–focused Microfinance Loan business, including the high cost of reaching customers, potential customers’ lack of financial and product awareness and vulnerability of household’s income to local developments, which could adversely affect our business, financial condition, results of operations and cash flows.
5. The company is subject to stringent regulatory requirements and prudential norms.
6. As at June 30, 2023 and March 31, 2023, 2022 and 2021, current accounts and savings accounts (“CASA”) ratio to total deposits (“CASA Ratio”) was 18.22%, 21.39%, 22.84% and 19.42%, respectively,
7. As of June 30, 2023, and March 31, 2023, as well as in 2022 and 2021, 74.70%, 75.04%, 81.16%, and 84.80%, respectively, of the total advances managed by ESAF Small Finance Bank consisted of microloans. A decrease in demand for these microloans could potentially have a negative impact on the bank's business, financial health, and cash flows.
8. As of June 30, 2023, and March 31, 2023, 2022, and 2021, 75.15%, 75.35%, 83.59%, and 85.50% of the advances were unsecured. If the bank cannot recover these advances promptly, it may adversely affect its financial condition, results, and cash flow.
9. ESAF Small Finance Bank primarily operates in South India, specifically in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Telangana, and the Union Territory of Puducherry. Any negative changes in the economy of South India could adversely affect the bank's financial situation and cash flows.
10. As of March 31, 2023, the bank failed to meet 17 of the 272 Risk-Based Supervision (RBS) Tranche III requirements. Penalties imposed by the Reserve Bank of India (RBI) for this noncompliance could harm the bank's reputation, financial condition, and cash flows.
11. Additionally, two of the bank's selling shareholders, PNB MetLife and Bajaj Allianz, have faced orders and penalties from the Insurance Regulatory and Development Authority of India (IRDAI) and the Securities and Exchange Board of India (SEBI).
12. The bank must establish a reserve fund by transferring at least 25% of the annual profit disclosed in the profit and loss account before declaring any dividends.
13. As of June 30, 2023, and March 31, 2023, 2022 and 2021, the gross non-performing advances (NPAs) as a percentage of gross advances were 1.65%, 2.49%, 7.83%, and 6.70%, respectively. Ineffective control over the level of gross NPAs or an inability to improve the Provision Coverage Ratio could adversely affect the bank's business, financial condition, and cash flows.
14. The bank, along with its promoters, is involved in several significant legal proceedings, including 862 criminal proceedings, with a total amount involved of Rs. 7.89 crores. Any unfavorable developments in these cases could potentially harm the bank's reputation, business, and cash flow.