About the Company

ESAF Small Finance Bank Limited is a small finance bank with a focus on unbanked and under-banked customer segments, especially in rural and semi-urban centers.

The bank has a 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.

The bank primarily deals in: -
1. Micro Loans, which comprise Microfinance Loans and Other Micro Loans;
2. Retail loans, which include gold loans, mortgages, personal loans, and vehicle loans
3. MSME loans
4. Loans to financial institutions
5. Agricultural loans.

The following table depicts the individual share of advances for the FY 2022-23.

Other services provided by the bank include safety deposit lockers, foreign currency exchange, giving our customers access to the Bharat Bill Payment System, money transfer services and Aadhaar Seva Kendra services. The bank also distributes third-party life and general insurance policies and Government pension products.

Industry Overview

The global economy is witnessing a tightening of monetary conditions in most regions. As per the IMF (World Economic Outlook Update – July 2023), global growth prospects are estimated to fall from 3.5% in 2022 to 3.0% in 2023 and 2024, the impact of which is expected to be witnessed in the Indian economy as well.

Despite the global slowdown, tightening of monetary conditions, and high inflation, India recorded a higher economic growth rate compared with many peer economies owing to its relatively strong local consumption, lower reliance on global demand, and continued resilience to external blows. India is expected to remain the fastest-growing economy in the world with a GDP growth of 6.0% projected in FY 2023-24 as per CRISIL MI&A.

Some Key Parameters to note are: -

1. Credit to the overall retail segment is expected to lead the growth of the banking sector, supported by healthy growth in housing, consumer durable, gold, and other personal loan segments. CRISIL MI&A expects bank credit to grow at 12-14% CAGR between FY 2022-23 and FY 2024-25.

2. CRISIL MI&A expects the deposit rate to inch up with an increase in competition and to support credit growth. The deposits are expected to grow by 11-12% in FY 2023-24 and SFBs’ deposits are 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.

3. The GNPA of banks is expected to improve to 3.8%-4.0% in FY 2023-24 due to robust collections, upgrades for large corporate accounts and lower slippages.

4. During FY 2022-23, the estimated interest earned as a percentage of total assets to have risen by ~80 bps and interest expended as a percentage of total assets to have risen by ~40%, resulting in an improvement in Net Interest Income to total assets at 3.3%.

5. The small finance banks' advances under management (which are gross advances plus off-balance sheet advances (AUM) are estimated to have clocked 29% CAGR from March 31, 2018, to June 30, 2023. CRISIL MI&A expects 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.

IPO Objectives

The Net Proceeds are proposed to be utilised towards augmentation of the Bank’s Tier-I capital base to meet the Bank’s future capital requirements, and for increasing business of the Bank which is primarily onward lending, expected to arise out of growth in the Bank’s assets, Bank’s loans/advances, and investment portfolio, and to ensure compliance with regulatory requirements on capital adequacy prescribed by the RBI from time to time.

Financials

The AUM of the bank has increased from Rs.8,425.93 Crores in FY 2020-21 to Rs16,331.26 Crores at a CAGR of 39.22%. The Interest Income of the bank has increased from Rs.1,641.17 Crores in FY 2020-21 to Rs.2,853.65 Crores in FY 2022-23 at a CAGR of 31.86% and the Net Profit has increased from Rs.332.59 Crores in FY 2020-21 to Rs.623.82 Crores in FY 2022-23 at a CAGR of 187.57%. The other key parameters of the bank are as follows: -

Valuation

The PE Ratio of the bank is 8.94 and the average PE Ratio of comparable peers is 19.35. The PB Ratio of the bank is 1.58 and the average PB Ratio of comparable peers is 2.32, thus indicating undervaluation in both aspects.

Peer Comparison

Key Risks

1. The business of the bank is concentrated in South India, particularly in the states of Kerala and Tamil Nadu. As of June 30, 2023, 62.43% of our banking outlets are in South India (including 43.43% in Kerala and 13.86% in Tamil Nadu), 73.09% of our gross advances are from customers in South India (including 43.45% from Kerala and 22.14% from Tamil Nadu) and 86.90% of our deposits are from banking outlets in South India (including 80.04% from Kerala and 3.36% from Tamil Nadu). Any adverse change in the economy of South India, particularly in the states of Kerala and Tamil Nadu, could hurt the financial condition, results of operations and cash flows of the bank.

2. The Bank and its Promoters are involved in certain material legal proceedings, including 862 criminal proceedings by the Bank with an aggregate amount involved of Rs. 7.88 Crores. Any adverse developments related to this could adversely affect the reputation, business, and cash flows of the bank.

IPO Details