ESAF to launch small finance bank operations on March 17

The company hopes to start operations with a network of around 85 branches, which would be established through the year. In the first phase, ESAF will have 15 branches and will open another 70 branches in the next three months.

ESAF to launch small finance bank operations on March 17


ESAF Microfinance, which has received license from the RBI to start a Small Finance Bank, informed that they will commence the business from March 17, 2017. Thrissur-based ESAF Microfinance had received the Small Finance Bank license from the Reserve Bank in November 2016. ESAF will be the first private commercial bank from Kerala since 1947.

A press release issued yesterday mentioned that Honourable Chief Minister of Kerala, Pinarayi Vijayan has consented to inaugurate the launch at Lulu Convention Centre, Thrissur at 10.30 AM. Full-fledged operations meant for customers will start on March 17 itself.

The company hopes to start operations with a network of around 85 branches, which would be established through the year. In the first phase, ESAF will have 15 branches and will open another 70 branches in the next three months.

An ecstatic K. Paul Thomas said that “With a customer base of 12 lakh and assets of Rs. 2451 crore, it is well-poised to expand operations when it turns into a bank.” He added that “For the first five years, we will deepen our focus in the States where we already have presence and have plans to open 450 branches and 600 customer service centres (small branches) over the next five years.” He also said that the business volume of the new bank is expected to cross Rs. 10,000 crore in five years.

The bank will give loans for farming, small businesses, housing and education. It will also have a spectrum of deposit options, for all customers including non-resident Indians (NRIs). The biggest advantage of becoming a bank, according to Thomas, is that ESAF can offer value based banking with a difference.

Inspired by the Nobel Laureate, Muhammed Yunus, K. Paul Thomas, has started ESAF in 1992 and had set up the micro-enterprise development agency in 1995. ESAF Microfinance which is among the 10 financial services firms picked by the RBI for setting up small finance banks has operations in 10 States and has a network of 285 branches, out of which 104 branches are based in Kerala.

Well begun is half done

Cut back to 1992. Having been inspired by the ‘servant leadership’ style practiced by Jesus Christ to promote social action, a young sales officer at IFFCO (Indian Farmers Fertilizer Cooperative Limited) cherished the dream of working for the betterment of society. During weekends and holidays, he provided career guidance programmes and counselling to job aspirants in villages. Soon, he realised the necessity of an organised framework to pursue his vision. With the support of his spouse, Mrs. Mereena Paul and friends, the future social entrepreneur then set up ESAF (Evangelical Social Action Forum) Society in May, 1992 which had sustainable holistic transformation of the poor and the marginalised as its objective.

Marching towards silver jubilee in 2017 March onwards, ESAF now has its presence in 10 states and employs more than 3500 people directly in different projects under diverse sectors such as microfinance, healthcare, retail, alternative energy, skill development, disaster management and research and development. ESAF Microfinance, a Non-Banking Financial Company (NBFC), has close to 13 lakh beneficiaries under its 285 branches (104 in Kerala) with a gross loan portfolio worth $    Million. In September 2015, ESAF Microfinance emerged as the only Kerala-based company to receive the license to function as Small Finance Bank. It was among the 10 institutions chosen by Reserve Bank of India (RBI) from 72 applicants, including four others from Kerala.

According to a study conducted by ESAF on Social Return on Investment (SRoI) of its Income Generating Loan (IGL) product in Kerala, which was promoted by Opportunity International, Australia, it was found that for every Re. 1 invested in ESAf Microfinance, there is a return equivalent to Rs. 3.19 in social value.

In an exclusive interview with K. Paul Thomas, he recounts his journey as a social entrepreneur as well as the imminent transformation of ESAF Microfinance into ESAF Small Finance Bank.

How did Grameen Bank of Prof. Muhammed Yunus in Bangladesh inspire you to venture into microcredit operations?

After setting up ESAF to promote social action, we decided to address the issue of unemployment first. However we soon realised that unemployment was not the real issue but rather the attitude towards it, particularly in Kerala. To tackle this, we launched career guidance classes for youngsters in villages. However, those who attended the classes started requesting for funds to set up business ventures. As a result, I decided to constitute a revolving fund to help them.

During that time (1993), I attended a seminar on the topic ‘Banking with the Poor.’ It was about replicating the Grameen Bank model of Bangladesh in India. After a thorough research for two years, I decided to do a pilot project based on the model at Pananchery village in Thrissur district. Ten women were selected and given a sum of Rs. 3000 each as loan to start a business venture. They were asked to repay the loan in installments of Rs. 70 per week. Using the fund, they bought cows and goats and started generating their own income. They also started repaying the loans promptly. It was a revelation for me that there were takers for small loans in Kerala. Then I did one pilot project for the fishermen community in Kodungalloor, one in Idukki and another two projects in Palakkad. By 1996, I was fully convinced about the scope of microfinance-based social development and wrote to Prof. Yunus of Grameen Bank expressing my wish to know more about this.

In May 1997, they invited me for a two-week exposure programme. I was allowed to remain attached to a bank branch to learn about its functioning. I also had an opportunity to interact with Prof. Yunus which gave me the confidence to replicate that model in India. They also offered me a seed capital of $40,000 at an interest rate of two per cent. With that fund, I expanded ESAF’s Micro Enterprises Development Project in 1998 focusing on small credit. In 2002, I resigned from my job at IFFCO after putting in 18 years of service. We started our operations in Tamil Nadu, Maharashtra and Chhattisgarh in 2004. However, we soon realised the limitations of raising capital while functioning as a charitable society. In order to have a cost effective delivery of microfinance services, through an RBI-licensed Non-Banking Financial Company (NBFC) we acquired Pinnai Finance and Investments in 2006 and transformed it into ESAF Microfinance and Investments (P) Ltd., in 2008.

What will be the major changes that will come into effect when ESAF Microfinance becomes ESFB?

The formation of ESFB will further support our vision of holistic transformation. As a microfinance entity, we are able to disburse only one type of loan to the beneficiaries. However, these people also require different types of banking services, including savings, housing loans, personal loans, insurance, pension and the like. Besides, many of our members have come of age in their businesses and are in need of bigger loans. As a bank we will be able to provide all these services. We will have access to retail deposits which will, in turn, reduce lending rates in future.

ESAF Microfinance will be the holding company and promoter of ESFB, which will manage the microfinance business as a microbanking sub-vertical. ESAF Society will be the CSR arm of the bank doing developmental programmes, including training and capacity building. We have also created a community cooperative which owns majority shares of the holding company. We have foreign investors – Dia Vikas Capital, a subsidiary of Opportunity International, Australia and Manaveeya Holdings, a subsidiary of Oiko Credit Netherlands. In September 2015, SIDBI Venture Capital Limited, wholly-owned subsidiary of SIDBI (Small Industries Development Bank of India), signed an equity participation agreement with ESAF Microfinance to make equity investments worth Rs. 25 crore. As per RBI mandate, ESFB will have a part-time chairman and a full-time MD and CEO (According to regulatory filing, K. Paul Thomas will be the MD and CEO of ESFB).

ESFB will have three service divisions – microbanking focusing on lower income segments, providing assets and liability services to them; retail liabilities focusing on HNWIs and middle income families, mostly for mobilising deposits and transaction banking, and retail assets that will be generated from the microbanking beneficiaries as well as general customers. During 2015-16, ESAF Microfinance registered a growth of 90 per cent in credit portfolio. In ESFB, we expect a growth of 60 per cent on year-on-year basis in microcredit.

We will start with a few branches. The corporate and registered office will be at Mannuthy. In the first year itself, we will have branches and retailing facilities for our present customers in all our existing geographies. Currently, our net worth is Rs. 300 crore which is adequate to begin the operations of ESFB. However, we may raise additional capital worth Rs. 150 crore through private equity soon.


We are actually entering into a new space. One of our primary goals is to introduce modern banking facilities to under-banked sections of society. So, we will be continuously conducting financial literacy programmes. This will be our strategy to attract new customers. It is an unexplored area and hence, we do not have direct competitors. As per RBI mandate, 25 per cent of our branches should be in un-banked rural regions. Besides, 50 per cent of loan assets should be below Rs. 25 lakh. Unlike other banks, the PSL (Priority Sector Lending) target for SFBs is 75 per cent.

We have been a single-product company all along. Now we are going to deal with multiple products and services driven by high-end technology, and multiple vendors. We have to spend more on infrastructure. These are all new to ESAF. But we are confident. Our advantage is that we are starting the bank with a customer base of 12 lakh. We have engaged E&Y as our institutional consultant to advise us on our transformation. We also have individual consultants in areas of technology and operations.

On technology and customer experience fronts, we aspire to be like ICICI Bank. While on the customer front, our focus will be to function like the Grameen Bank, strictly following the ethos of microfinance.

What has been ESAF’s approach to holistic transformation?

We have been following three-pronged bottom-line approach comprising financial sustainability, social transformation and environmental awareness. Economic empowerment is only one aspect of sustainable livelihood of the rural population. So we follow an integrated approach taking into account the development of social, environmental, health and other factors.

Besides financing, our vehicles for achieving holistic transformation include:

ESAF Swasraya Producers Company Ltd. (ESPCL)

ESPCL supports small rural producers of handicrafts, herbal products, agriculture products, and dairy and meat products in capacity building, production, value addition, quality assurance and marketing. In 2006, a producer company was formed incorporating multiple producers, including small-scale farmers, artisans, dairy farmers and the like. However, it failed to yield desired results as it became difficult to protect the interests of multiple stakeholders. Consequently, a separate company was formed in 2009 exclusively for dairy farmers. However, there were challenges due to constraints in mobilising funds.

But things have changed after the present Union Government came to power. A decision was taken to set a target of registering 2000 companies in a financial year and National Bank for Agriculture and Rural Development (NABARD) and SFAC (Small Farmers’ Agri-Business Consortium) were entrusted with the task of promoting the initiative. ESAF has been selected as one of the resource agencies for both NABARD and SFAC. We have formed more than 70 producer companies for different crops which include 20 each in Kerala and Karnataka, 22 in Tamil Nadu and the rest in Chhattisgarh.

In Kerala, producer companies have been set up for mango farmers of Muthalamada, rice farmers of Palakkad, vegetable farmers of Vattavada in Idukki and nutmeg farmers of Muvattupuzha. The major advantage of these companies is that they will be able to do market interventions collectively and come out with branded products. Moreover, ESFB can finance the projects of these producer companies.

ESAF Healthcare

ESAF’s Healthcare vertical seeks to ensure world-class treatment facilities for the rural and semi-urban poor. In 2007, we acquired a 100-bed hospital and nursing school at Thachampara in Palakkad. We are also operating two primary clinics. Our members are given special discounts for treatment at these centres.

Now we are focusing on creating awareness among the public to prevent lifestyle diseases. Over the past two years, we have been piloting Arogya Mithra project in Palakkad district whereby select clients are given training to become rural health entrepreneurs who check BP and blood sugar level of members on a regular basis and advice them on healthy lifestyle and prevention of Non-Communicable Diseases. We are also planning a tie-up with existing hospitals to provide tele-medicine services to people in remote villages, especially in central and north India.

ESAF Retail

The two main activities of ESAF Retail are marketing products manufactured in rural areas and acting as a facilitator for providing certain consumer products which are of high demand among the rural population. A mobile-based e-commerce platform for ESAF’s retail activities is also on the cards. For marketing rural products, we have professional teams who, on behalf of the producers, participate in leading exhibitions hosted in metro cities. For instance, handicrafts made by tribal artisans of Jharkhand are put on display at exhibitions held at Pragati Maidan in New Delhi. We have reduced the number of supermarkets owned by us from five to two as we are planning to enter into a partnership with retail giants instead of setting up our own facilities. Besides, we are thinking of introducing micro-retailer concept whereby a representative of ESAF will supply products sourced from producers to customers of a particular region.

Since we are serving 10 lakh families per week through our branches, we have an effective channel to reach out to the masses in rural areas. In the past one-and-a-half years, we have been able to sell 1.5 lakh Samsung mobile phones through our network. We also supply water purifiers, energy-efficient cooking stoves and solar lighting solutions.

ESAF Natural Resource Management (NRM)

We support initiatives to harness non-conventional energy like construction of biogas plants, use of solar energy products and setting up of incinerators for managing bio-degradable solid waste. Apart from holding massive awareness programmes, we are trying to aggregate carbon credit and monetise the same so that we could earmark more funds for environmental protection activities. In 2013-14 fiscal, we have offset one lakh tonne carbon emission through supply of solar energy-based products. We were one among the three finalists for the European Microfinance Award 2014 instituted by the Luxembourg Ministry of Foreign and European Affairs.

Livable Cities India

With the support of Health Bridge, Canada, ESAF is implementing Livable City programme in three cities of India – Nagpur, Bengaluru and Thrissur. The objective is to explore possibilities of providing more  public spaces and improved pedestrian facilities through research and advocacy.

Looking back, how do you evaluate the functioning of ESAF? How did the transformation from charity to sustainability happen?

ESAF began as a charity initiative working with the support of generous persons. However, after some time I realised that there are limitations to this model as donations are often instantaneous in nature. People show willingness to donate when there is a natural calamity or a disaster. But I found it difficult to source donations from people on sustained and long-term basis to develop a community. That was the time my attention was drawn towards the sustainable model adopted by Grameen Bank. ESAF has succeeded in achieving this level of growth only because of adopting that sustainable financial model.  No organisation can survive if it is not financially sustainable. Through our efficiency, we should generate a surplus amount and that fund could, in turn, be invested back into society.

Being a social enterprise, how challenging has it been to bring in/maintain professionalism in the organisation?

From day one onwards, I could bring in professionalism thanks to my experience at IFFCO. Even if I am not here, the system will work as usual. There are standard operating procedures and the delegation of power is done effectively. All department heads are members of the management committee, which is convened once in a month. We have a separate compliance department as well. Operationally, all divisions are independent. We have been following a participatory decision making process.

Can you share details of employment generated through ESAF’s projects with a timeline?

When it started in 1992, I was alone. Later, a volunteer joined in 1994. By 1998, it rose to 10 members. Since then we are on our growth phase. Now ESAF has 3000 direct employees. Indirectly, six lakh people have become entrepreneurs. With the commissioning of ESFB, we aim to provide employment to 5000 people in the next five years.

In your view what made ESAF eligible for SFB licence?

Most importantly, I think ESAF got the licence because of its commitment to financial inclusion. RBI’s idea behind launching SFBs was to widen financial inclusion. Though it has been trying to achieve it through existing banks since 2005, it hasn’t produced desired results as banks failed to view it as profitable business. Thus, the authorities thought of upgrading existing microfinance institutions as regular banks instead of pushing reforms through existing regular banks. The same model has already been implemented in various countries. So I knew that microfinance institutions will have a definite edge in SFB selection. Besides, ESAF’s presence in totally unbanked villages of Jharkhand, Madhya Pradesh and Chhattisgarh was another advantage. Our integrated approach towards economic development of rural population beyond business motives might be another reason.

What is your take on Kerala’s startup initiatives?

Generally, it is the right time for entrepreneurs for various reasons. For one, there is recognition for entrepreneurs now; be it in government offices or banks. Moreover, there exists an ideal ecosystem with funds available from the State and Central Governments. When we started, no funds were available to us. There were no investors. Social enterprise was never considered a viable option. People are either interested in business or giving charity. As a microfinance institution, ESAF has succeeded in creating a large number of micro-level startups through our credit support and training programmes. Now, being a bank, we will be able to support startups in a much better way. We will be partnering with Micro Units Development and Refinance Agency (MUDRA) Bank to create a dedicated fund to support micro enterprises.

How does a day in your busy life look like?

My day starts at 6 am with the daily prayer. I read two business dailies and a vernacular newspaper before going to office at 9.30 am. Normally, I return from office at around 7.30 pm. Of late, I have started doing some physical exercise in the nearby gymnasium. After reaching home, I surf through discussions on various TV news channels for some time. After the daily family prayer, I spare some time for reading, checking mails and preparing for the next day before going to bed at around midnight.

Small Finance Bank in a Nutshell

As per RBI guidelines, SFB should primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. There will not be any restriction in the area of operations of SFBs. The minimum paid-up equity capital for SFBs should be Rs. 100 crore. Unlike Microfinance Institutions (MFIN), SFBs can issue debit cards, and mobilise savings, mutual funds, insurance and pension. At least 50 percent of its loan portfolio should constitute loans and advances of below Rs. 25 lakh. The transition of SFBs to universal banks would be subject to fulfilling of requirement as applicable to universal banks.