ESAF is a small finance bank with a focus on unbanked and under-banked customer segments, especially in rural and semiurban centres. They have a network of 700 banking outlets and 559 ATMs spread across 21 states and two UTs, serving 7.15 million customers.
They started business as a small finance bank in 2017. The ‘ESAF’ brand has been built over more than 27 years, beginning in 1995 when ESAF Foundation started its microloan activities.
The gross advances to customers in rural and semi-urban centres is 62.97% of total advances and over 70% of banking outlets are located in rural and semi-urban centres.
Their primary products are advances (asset products) and deposits (liability products).
ABOUT THE INDUSTRY
Despite its larger contribution to GDP of 47%, the rural segment’s share in credit remains fairly low at @ 8-9% of the overall credit. This provides a huge market opportunity for SFBs and other players present in the segment.
SFBs cost of funds is low substantially as they are allowed to raise deposits. This will also help them lend at more reasonable rates to customers, hence enhancing their cross-sell opportunity for asset products, insurance etc.
SFB AUM (Advance Under Management) is estimated to have crossed Rs. 1,900 billion. It is expected that SFB’s AUM to grow at ~22-24% CAGR between 2023 and 2025, as most of the SFBs have completed the transition phase and are likely to benefit from their operating leverage.
Strengths And Risks
+ Micro Loan Segment: ESAF Small Finance Bank has over 3.25 million customers with Micro Loans, the majority of whom are women. Their understanding of the micro loan segment has enabled them to successfully expand business outside of Kerala.
+ Focus on Rural Segment: There are growth opportunities in rural centres in India as rural centres have lower financial inclusion compared to urban areas and there is less competition for banking services in rural centres.
+ Growing Retail Deposits: Current & Savings Accounts provide a stable and low-cost source of deposits compared to term deposits. ESAF’s total deposits increased from Rs. 89,99.4 Cr in 2021 to Rs. 146,65.6 Cr in 2023, a CAGR of 27.66%.
+ Technology-driven Model: ESAF offers its customers various digital platforms, including an internet banking portal, a mobile banking platform, SMS alerts, bill payments and RuPay branded ATM cum debit cards, making it easy to bank even in remote places.
+ Experienced Team: ESAF has an experienced Board comprising members with diverse business experience, many of whom have held senior positions in well-known financial services institutions.
- Unsecured Loan Portfolio: ESAF’s business is significantly dependent on our micro loan segment. These Microfinance Loans and Other Micro Loans are provided to individuals without being secured by collateral, which is risky.
- South Concentration: The business is concentrated in South India, particularly in the states of Kerala and Tamil Nadu. They have over 60% of banking outlets and 73% of gross advances are from customers in South. This increases geographic concentration risk.
- Segment Risk: They face challenges in our rural–focused Microfinance Loan business, including the high cost of reaching customers, potential customers’ lack of financial awareness and vulnerability of household’s income to local developments.
- Stringent Regulation: SFBs are subject to stringent regulatory requirements and prudential norms. If they are unable to comply with such laws, regulations and norms it may have an adverse effect on business.
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