ESAF Small Finance Bank Ltd Management Discussions

INDIAN ECONOMY OVERVIEW

Indias economic trajectory for 2025-26 reflected a phase of confident expansion, with GDP growth rate reported at 7.6%, marking a clear step up from the prior years 6.5%. The expansion was driven by a strengthening consumption cycle and accelerating manufacturing activity. Despite a fragmented global trade environment shaped by evolving geopolitical alignments, Indias domestic growth engines have gained depth and resilience. Tax rationalisation and the maturation of digital public infrastructure have deepened this resilience, cementing Indias standing. Growth was broad-based across sectors. Agriculture remained on a steady footing, supported by the Digital Agriculture Mission and targeted programmes for selfreliance in pulses. Industrial output gained traction, with manufacturing emerging as a standout contributor. The services sector retained its position as the primary growth engine, underpinned by record levels of digitally delivered services and an ambitious push to expand Indias share in global services trade. Merchandise exports navigated external headwinds with resilience, while strong capital inflows helped contain the current account deficit. Foreign exchange reserves stand at around $690 billion, according to Reserve Bank of India (RBI) data as of May 2026. While the headline figure is among the worlds largest reserve holders, there is growing sensitivity to global commodity prices and valuation changes on account of the developing geopolitical concerns.

During the year, GST 2.0 was launched leading to a major overhaul of Indias tax system and simplifying the structure into two main slabs—5% and 18%—with a 40% rate for luxury/sin goods. The key objective of the reform was to reduce compliance cost on tax filing, make MSMEs more competitive and boost consumer demand by lowering tax on daily essential goods.

The Reserve Bank of Indias (RBI) Monetary Policy Committee held the repo rate steady at 5.25% in its April 2026 review, following a cumulative reduction of 100 basis points through 2025-26. The pause reflects a measured response to persistent global uncertainties, particularly risks stemming from geopolitical conflicts and resultant effect on energy markets. Domestic inflation moderated sharply to 2.0%, preserving room for policy support without compromising macroeconomic stability. The neutral stance balances the need to sustain credit growth against the imperative of insulating the economy from external volatility.

The financial system has strengthened materially, with gross non-performing assets (GNPA) declining to a multi-decade

low of 2.1% by late 2025. This reflects improved credit discipline and the structural impact of insolvency reforms. However, there are also risks. Climate variability affecting agricultural output and global commodity price fluctuations are key concerns. For 2026-27, growth is projected to moderate to 6.8%-7.2%, supported by a recovery in rural demand and sustained focus on macroeconomic stability and investor confidence. The Viksit Bharat@2047 vision anchors this trajectory in inclusive development, with structural reforms and fiscal prudence.

INDIAN BANKING SECTOR OVERVIEW

Indias Banking, Financial Services, and Insurance (BFSI) landscape is undergoing a structural transformation, shaped by technology adoption, evolving regulatory frameworks, and strong domestic credit momentum. As a key enabler of the Viksit Bharat@2047 vision, the sector is expanding financial inclusion while strengthening institutional resilience and efficiency.

Key Trends

• Consolidation and Capital Strengthening:

The sector is in a renewed phase of consolidation. Strategic mergers are creating large, well-capitalised institutions better equipped to support complex infrastructure and long-term investment cycles. Public sector banks have demonstrated notable profitability, strengthening their balance sheets and capital adequacy. This positions them with greater capacity to absorb economic shocks.

• Digitalisation with Embedded Security: Digital banking has evolved into a security-centric ecosystem. Regulatory emphasis has led to widespread adoption of advanced authentication mechanisms and biometric verification across platforms. The rapid expansion of digital payment systems reflects both scale and trust. Non-Banking Financial Companies (NBFCs) and small finance banks (SFBs) are leveraging AI to develop innovative credit assessment models that extend formal finance to underserved rural segments.

• Focussed Credit Expansion: Credit growth remains broad-based, with a clear policy focus on strengthening the MSME segment. Revised classification norms and targeted financial products are improving access to institutional credit for smaller enterprises. Enhanced guarantee mechanisms and tailored lending solutions are helping address long-standing financing gaps, while improved asset quality reflects stronger credit discipline and more effective risk management practices across the sector.

SMALL FINANCE BANKING SECTOR OVERVIEW

SFBs have evolved from basic inclusion mandates to delivering technology-enabled credit solutions across customer segments, establishing themselves as integral pillars of Indias financial system. In 2025-26, their evolution is marked by a decisive shift from microfinancecentric operations to comprehensive, digitally integrated banking platforms designed for emerging and underserved customer segments. SFBs are enabling wider economic participation through tailored offerings across various segments.

Their footprint has expanded with the rise of phygital banking models, combining on-ground presence with digital accessibility. With a dominant share of their branches located in unbanked rural and semi-urban centres, SFBs have become key enablers of government- backed livelihood and enterprise initiatives. AI-led credit assessment frameworks have improved risk evaluation and operational efficiency, enabling deeper penetration of credit services. By channelling rural savings into regulated financial systems, SFBs are gradually displacing informal lending ecosystems and fostering long-term financial security. This transformation has been largely supported by the adoption of technology as internet penetration has widened access, allowing customers in even the remotest areas to access financial services like mobile banking and digital payments anytime, anywhere.

On the regulatory front, RBI has provided a supportive operating environment. One such initiative during the year was the decision to lower Priority Sector Lending requirements for small finance banks from 75% to 60%. It is a welcome development, offering greater portfolio flexibility, improved capital allocation, and enhanced risk diversification to the industry.

The continued expansion of SFBs is redefining financial inclusion, transforming previously excluded populations into active contributors to the formal economy. SFBs are supporting capital formation at the grassroots and carrying economic progress to the most remote regions through a stable, technology-enabled banking ecosystem.

MICROFINANCE SECTOR OVERVIEW

Microfinance remains a cornerstone of Indias financial inclusion framework in 2025-26, extending credit, savings, and insurance to segments traditionally excluded from formal banking. Anchored in the Joint Liability Group (JLG) model, microfinance institutions (MFIs) support over 100 million households, with women constituting nearly 98% of the borrower base. Regulatory refinements by the RBI in 2022 and 2025 have reinforced this evolution.

Household-level income assessments are now central to promoting responsible lending and preventing borrower over-indebtedness.

The sector is, however, undergoing a prudent recalibration. Following a phase of aggressive expansion, 2025-26 has seen a shift toward a risk-first approach, with the aggregate microfinance portfolio stabilising at approximately Rs. 3.30 lakhs crore. Elevated credit costs and a temporary increase in Portfolio at Risk (PAR 180+), reaching around 15%, have prompted institutions to prioritise portfolio quality over rapid scale. Lending strategies are becoming more selective, with a focus on existing customer relationships and optimised loan sizes to balance growth with sustainability.

Alongside this recalibration, the operating environment has been shaped by emerging disruptions. The rise of unregulated digital lenders and localised Karja Mukti narratives have, weakened repayment discipline within borrower groups, posing challenges to the JLG framework. In response, the RBI and state authorities have strengthened supervisory oversight to address coercive practices and predatory lending. These measures have, at times, tempered short-term credit expansion. To enhance transparency, the sector is increasingly leveraging digital public infrastructure (DPI) and account aggregator frameworks. This is enabling a more comprehensive assessment of borrower indebtedness across formal and informal channels.

On the regulatory front also, MFIN Guardrails 2.0, effective 1^st April, 2025, restricted microfinance borrowers to a maximum of 3 lenders to curb over-leveraging. These voluntary industry standards, adopted by Small Finance Banks (SFBs) and NBFC-MFIs, aim for long-term portfolio quality but temporarily increased rejection rates, reduced collection speeds, and elevated delinquencies.

Early indicators toward the close of the fiscal year, however, point to a gradual recovery. Improved collection efficiencies and a revival in targeted lending segments, particularly among SFBs and NBFC-MFIs, are driving growth in select portfolios. This rebound is a reminder of the sectors inherent resilience and its enduring role in advancing grassroots economic mobility.

ESAF SMALL FINANCE BANK: OVERVIEW

ESAF Small Finance Bank (ESAF Small Finance Bank, The Bank, Our Bank, or We) has built its journey on a development-first philosophy. The Bank has steadily evolved into a regulated banking institution focussed on financial inclusion. The origins trace back to 1992, when Dr. Kadambelil Paul Thomas, along with a group of like-minded individuals, established ESAF Foundation to promote micro-enterprises, drive socio-economic progress, and improve community health. This vision gained operational

momentum in 1995 with the launch of microfinance initiatives aimed at extending credit access to underserved and marginalised communities.

In 2006, Dr. Thomas and his associates acquired the Corporate Promoter of ESAF Small Finance Bank, initiating a structural shift to scale these efforts. The Foundation subsequently transferred its microloan portfolio to the Corporate Promoter under a business transfer agreement executed on March 31,2008, enabling greater institutional focus and regulatory alignment.

The next phase of evolution came in 2014, when the Corporate Promoter obtained NBFC-MFI status, strengthening its position within the formal financial system. This set the stage for a pivotal transition in 2017, when the lending and financing business was transferred to ESAF Small Finance Bank under a business transfer agreement signed on 22^nd February 2017, and made effective on 10^th March 2017. This marked the formal transition into an SFB. The Bank remains structurally aligned with the needs of the underserved segments and our focus going forward is on deepening financial access through disciplined growth, responsible banking practices, and technology-driven solutions that scale with the communities we serve.

Commitment to the Triple Bottom Line: People, Planet, and Prosperity

Our approach to growth is grounded in a Triple Bottom Line philosophy that integrates social impact, environmental responsibility, and economic progress. This commitment is reflected across three core pillars:

• People: Expanding access to inclusive banking services, particularly for underserved and marginalised communities.

• Planet: Promoting sustainable practices to minimise environmental impact and support long-term ecological balance.

• Prosperity: Driving economic empowerment and financial inclusion through responsible financial solutions and strengthening financial literacy.

In line with this approach, the Bank has established a comprehensive ESG (Environmental, Social, and Governance) framework. It focuses on safeguarding the environment, advancing financial inclusion and gender equality through targeted offerings, and reinforcing governance through accountability, transparency, and adherence to recognised ESG standards.

Our Presence

Our network spans 24 states and 2 union territories comprising of 804 Banking Outlets, 720 ATMs and 1,047 Customer Service Centres managed by 32 Institutional Business Correspondents, 2,923 Banking Agents, 737 Business Facilitators, and 10,994 Employees. Our Business

Correspondents play a key role in sourcing and servicing all types of loans with a special focus on microloan customers.

As of 31^st March 2026, the Bank crossed a significant milestone of serving more than 100 lakh customers. We have always maintained a clear strategic focus on serving customers in rural and semi-urban markets. Our distribution strategy reinforces this focus, with 69% of banking outlets located in these geographies, enabling deeper penetration and more effective service delivery.

BUSINESS OVERVIEW

The financial standing, operational performance, and cash flow dynamics of our Bank are shaped by several key factors.

The table below highlights the growth of our total loan book, deposits, and other business metrics.

Particulars		2024-25
Gross Advances ( crore)	22,426	18,779
Deposits ( crore)	25,850	23,276
States/UTs Combined (Number)	26	26
Banking Outlets (Number)	804	787
Business Correspondents (Number)	32	35
Customer Service Centres (Number)	1,047	1,106
Banking Agents (Number)	2,923	4,405
Business Facilitators (Number)	737	735
ATMs (Number)	720	693

Advances

The Banks asset-side offerings are diversified to address

the credit needs of multiple customer segments:

• Microloans: Primarily comprising microfinance and other small-ticket loans aimed at financially excluded customers.

• Retail Loans: Including mortgages, personal loans, and vehicle loans, catering to individual financing needs.

• MSME Loans: Supporting Micro, Small and Medium Enterprises to drive entrepreneurship and local economic activity.

• Loans to Financial Institutions: Extending credit to other financial entities to enhance capital flow within the ecosystem.

• Gold Loans: A secured loan where Gold is used as a collateral to enable individuals to access quick funds.

• Agricultural Loans: Financing agricultural activities and allied sectors, supporting rural livelihoods.

Gross Advances Analysis for 2025-26 and 2024-25

Advance Type	2025-26		2024-25
	Amount	% of Total Gross Advances	Amount	% of Total Gross Advances
Micro Loans	8,746	39%	8,857	47%
Retail Loans	2,080	9%	1,480	8%
Vehicle Loans	625		437
Mortgage Loans	1,064		707
Others	390		336
MSME Loans	617	3%	510	3%
Loans to Financial Institutions	867	4%	1,182	6%
Gold Loans	8,858	39%	5,734	31%
Agricultural Loans	1,257	6%	1,017	5%
Total Gross Advances	22,426	100%	18,779	100%

Business Performance

Total Gross advances have grown strongly during the year by 19%, with growth supported by majority of the product segments. We have made meaningful progress in reshaping our portfolio mix in line with our de-risking strategy, enabling a greater shift toward secured and better-rated assets.

As part of our de-risking strategy, we have defined a clear strategic path toward secured lending called MARG. consisting of MSME, Agriculture, Retail and Gold loans. This transition is enhancing portfolio resilience, reducing volatility, and supporting sustainable long-term growth. An added advantage is that all the constituent segments under the MARG framework exhibit significantly lower NPA levels, thus helping us improve our asset quality as well. Together, the MARG portfolio accounts for 57% of our total advances and secured assets now constitute 61% of our gross advances, compared to 53% as of 31^st March 2025.

For the microfinance portfolio, during the year, we adopted a risk-aware approach with disciplined underwriting. As a result, the microfinance book has been rationalised from Rs. 8,857 crore in 2024-25 to Rs. 8,746 crore in 202526. Due to various initiatives undertaken by the bank such as strengthening field engagement through Sangam process enhancements, targeted sourcing of higher- quality customers, structured graduation to individual lending, and focused resolution of delinquent accounts, the microfinance portfolio is on a more stable footing now. Going ahead, we remain firmly on track to achieve our stated target of 70% secured portfolio as a long-term plan. Also, the microfinance sector is currently witnessing

improving operating environment and we will continue to grow it responsibly with a calibrated approach.

Yield on Advances for the year 2025-26 moderated to 15.7% as compared to 18.3% in the previous year largely due to the shift in portfolio mix, the pass through of rate cuts, higher slippages and non-recognition of income on high yielding micro loans. With deposit costs also moderating in line with the industry and focus on growing the secured asset book, yields on advances are expected to remain range bound.

Deposits

Our Bank offers a comprehensive range of liability products, including current accounts, savings accounts, term deposits, and recurring deposits. The cost associated with these liabilities is influenced by external factors like market competition, interest rate movements, and liquidity conditions in the Indian credit market. Internally, elements such as our credit ratings, available credit lines, and ability to mobilise low-cost or non-interest-bearing deposits, particularly through current accounts, play a key role in determining our overall cost of funds.

Our primary source of funding is a cost-efficient deposit base, largely driven by retail depositors across India. This is supported by the strategic expansion of our branch network and the development of tailored financial products. We cater to a wide spectrum of depositor segments and to serve these segments, we utilise a diversified distribution network comprising our banking outlets, Business Correspondents, Customer Service Centres and alternative delivery channels. This approach helps us sustain a stable and cost-efficient funding structure through deposits.

Deposits Analysis for 2025-26 and 2024-25

Deposit Type	2025-26		2024-25
	Amount	% of Total Deposits	Amount	% of Total Deposits
Demand Deposits (A)	365	1.4%	331	1.4%
Savings Deposits (B)	5,816	22.5%	5,452	23.4%
CASA (C=A+B)	6,181	23.9%	5,783	24.8%
Term Deposits (D)	19,670	76.1%	17,494	75.2%
Total Deposits (C+D)	25,850	100%	23,276	100%
Bulk Deposits	2,176	8.4%	1,637	7.0%
Retail Deposits	23,674	91.6%	21,640	93.0%

Business Performance

As of 31^st March 2026, total deposits reached Rs. 25,850 crore, an 11% growth from Rs. 23,276 crore last year. This growth was supported by both our CASA and term deposits and reflects our commitment to broadening our deposit base.

CASA balances grew to Rs. 6,181 crore, up 7% year-on-year, with a CASA ratio of 23.9%.

We expect CASA to gradually improve, supported by continued focus on customer acquisition, service quality, and branch-led growth. Retail deposits increased to Rs. 23,674 crore, growing 9% compared to previous year

and remained strong at 92% of total deposits, reflecting a stable and granular deposit base. Further, 88% of bulk deposits carry a non-prepayment clause, providing stability to our funding base.

The Credit-to-Deposit (CD) ratio has improved to 83.5%, reflecting stronger credit growth, while a healthy Liquidity Coverage Ratio (LCR) of 143% indicates a comfortable liquidity position and overall financial stability.

The moderation in deposit pricing in line with soft interest regime reflected in our cost of deposits. The overall cost of deposits stood at 7.1% in 2025-26 as compared to 7.5% in 2024-25

RESULTS OF OPERATIONS Profit and Loss Statement

Particulars	2025-26	2024-25	Y-o-Y change
Income
Interest Earned	3,537	3,857	(8%)
Other Income	811	472	72%
Total Income	4,348	4,329	0%
Expenditure
Interest Expended	1,837	1,811	1%
Operating Expenses	1,799	1,904	(6%)
Total Expenditure	3,636	3,715	(2%)
Pre-Provision Operating Profit	712	614	16%
Provisions and Contingencies	878	1,079	(19%)
Exceptional Items	0	58
Net Profit for the Year	(166)	(521)

The Banks total income reached Rs. 4,348 crore in 2025-26, from Rs. 4,329 crore in 2024-25. The dip in interest income was offset by growth in non-interest income which was driven largely by higher fee income , Commission income from third party products and income from PSLC.

Net Interest Income

The Banks net interest income was Rs. 2,047 crore in 2024-25 and reached Rs. 1,700 crore in 2025-26.

Particulars	2025-26	2024-25
Interest Earned	3,537	3,857
Interest Expended	1,837	1,811
Net Interest Income	1,700	2,047

Our interest income was influenced by the balance of interest-earning advances and their corresponding yields, higher slippages in microloans and the change in mix of secured and unsecured loans during the year. Other factors include the balance of investments that generate interest income and average interest-earning balances held with the RBI and other interbank funds with their respective yields. On the other hand, our interest expenditure is influenced by the average balance of total deposits and borrowings with their associated costs.

On account of the above factors, net interest margin stood at 6.4% for 2025-26 as compared to 8.1% for 2024-25, but some improvements were seen from the second half of the fiscal supported by lower cost of funds and reduction in fresh slippages. This combined with an improving asset quality and better operational efficiency has helped improve operating profitability.

Provisions and Contingencies

Particulars	2025-26	2024-25
Provision towards NPA/Write-offs [A]	948	1,242
Provision towards/(Write-Back of Provision towards) Standard Assets [B]	(13)	6
Provision Made towards Income Tax
Current Tax Expense [C]	(4)	0
Deferred Tax Charge (Credit) [D]	(58)	(172)
Total Provision Made towards Income Tax [E] = [C] + [D]	(62)	(172)
Other Provisions and Contingencies [F]	5	3
Total Provisions and Contingencies = [A] + [B] + [E] + [F]	878	1,079

Our operational performance is closely linked to our ability to manage credit quality effectively, which is assessed in part through the monitoring of NPAs. In line with RBI guidelines, loans are classified as NPAs based on the period of nonpayment, requiring appropriate provisioning, including for standard assets. NPAs are further categorised into sub-standard, doubtful, and loss assets.

To mitigate these risks, we have implemented robust credit appraisal frameworks and disciplined loan disbursement processes, supported by continuous monitoring mechanisms. We also utilise advanced data analytics and automated credit scoring tools to improve the accuracy and efficiency of credit evaluation. Certain loan segments, including microloans and selected retail loans, are unsecured, which elevates credit risk in the absence of collateral. In cases of default, recovery options are primarily limited to legal measures.

Net Profit for the Year

As a result of our corrective actions and strategic shift to secured loans and also on account of provision requirement on higher slippages in Micro loan , we were able to return to profitability in the second half of the year and reduce the total losses for the year to Rs. 166 crore compared to Rs. 521 crore in 2024-25.

Statement of Assets and Liabilities

ESAF Small Finance Banks assets, as recorded at the end of the specified period/year, are detailed below:

Particulars	2025-26	2024-25
Cash and Balances with the RBI	1,114	1,351
Balances with Banks and Money at Call and Short Notice	61	628
Investments	6,399	5,995
Advances	21,594	18,028
Fixed Assets	516	300
Other Assets	1,184	876
Total Assets	30,868	27,178

Cash and balances with the RBI decreased to Rs. 1,114 crore from Rs. 1,351 crore as on 31^st March 2025. Whereas balances with banks and money at call and short notice decreased to Rs. 61 crore from Rs. 628 crore as on 31^st March 2025.

Our investments increased to Rs. 6,399 crore from Rs. 5,995 crore as on 31^st March 2025. Yield on Investments stood at 6.4% in 2025-26, compared to 6.6% in 2024-25.

The table below provides a detailed breakdown of the Banks advances (net of provisions) across two categories: microloans and other loans. Microloans include microfinance loans as well as other microloans, while other loans consist of retail loans, MSME loans, gold loans, loans to financial institutions and agricultural loans.

Advances	2025-26	2024-25
Microloans	8,027	8,211
Other Loans	13,567	9,816
Total Net Advances	21,594	18,028

The Banks fixed assets increased primarily due to addition of new branches and ongoing technology transformation.

The Banks other assets mainly consist of accrued interest, prepaid taxes, and tax deductions at source (net of provisions). They also include deferred tax assets (net) and other items, including GST input credits, security deposits, NEFT/RTGS settlement receivables, and prepaid expenses. The Banks other assets increased to Rs. 1,184 crore from Rs. 876 crore as of 31^st March 2025, mainly due to increase in DTA, interest accrued on advances on account of increase in business.

Capital and Liabilities

The table below delineates our capital and liabilities as of the specified dates:

Particulars	2025-26	2024-25
Capital	516	515
Employee Stock Options Outstanding	6	4
Reserves and Surplus	1,264	1,430
Deposits	25,850	23,276
Borrowings	2,753	1,406
Other Liabilities and Provisions	479	547
Total Liabilities	30,868	27,178

Our reserves and surplus are subject to fluctuations driven by changes in share premium from the issuance or repurchase of equity shares, and by movements in the profit and loss account reflecting the net profit or loss for the fiscal year. As a result of these factors, the Banks reserves and surplus decreased to Rs. 1,264 crore.

We have leveraged the longstanding strength of the ESAF brand, built over more than three decades. This brand recognition has significantly contributed to the rapid growth of our deposit portfolio since the commencement of our operations. We made steady progress in deepening our retail deposit franchise, specially across rural and semi-urban markets. These deposits are beneficial as they typically carry lower interest rates compared to bulk deposits. Retail deposits remained strong at 92% of total deposits and have increased to Rs. 23,674 crore as on 31^st March 2026 from Rs. 21,640 crore as on 31^st March 2025.

The table below provides a comprehensive breakdown of the Banks borrowings as of the specified dates:

Particulars	2025-26	2024-25
Borrowings in India:
- Reserve Bank of India	500	-
- Other Banks	-	-
- Other Institutions and Agencies	1,490	1,018
- Subordinated Debt	715	340
- Perpetual Debt Instrument	48	48
Borrowings Outside India	-	-
Total Borrowings	2,753	1,406

We meet our liquidity and capital requirements primarily through shareholder capital, customer deposits, and institutional borrowings. Over time, we have diversified sources of our borrowings to include funds from the RBI, institutional agencies, other banks, subordinated debt, and perpetual debt instruments. As on 31^st March 2026, the Banks borrowings increased to Rs. 2,753 crore compared to Rs. 1,406 crore as of 31^st March 2025 and the average cost of borrowings stood at 8.0% compared to 8.6% as of 31^st March 2025.

The Banks other Liabilities and Provisions mainly consist of payables, inter-office adjustments (Net), interest accrued and provisions including Standard Assets, expenses, etc. The Banks other Liabilities and Provisions assets stood at Rs. 479 crore from Rs. 547 crore as of 31^st March 2025.

Financial Instruments and Off-Balance Sheet Arrangements

The Bank transfers advances through interbank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating; the aggregate amount of participation is classified under advances. In the case of participation without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is participating, the aggregate amount of participation is shown as due from banks under advances. During the year Bank transferred certain gold loan book through IBPC on risk sharing basis amounting to 650 Crore and netted off with Gross advances in the books of accounts.

The table below sets out the outstanding IBPCs as of the specified dates:

Particulars	2025-26	2024-25
Outstanding Amount of IBPCs	650	-

Sale of NPAs to Asset Reconstruction Companies

In 2025-26, we transferred NPAs to Asset Reconstruction Companies (ARCs), with such advances being deducted from our total advances. Notably, we have not done any technical write-offs during the year.

However, ESAF Small Finance Bank continues to act as a collection agent for these assets and earns fees for this role. The table below presents the outstanding advances transferred to ARCs.

Particulars	2025-26	2024-25
Cumulative NPAs Sold to ARCs Outstanding	3,150	861

OUR BUSINESS SEGMENTS

We operate across four primary business segments: Treasury, Wholesale Banking, Retail Banking, and Other Banking

Operations.

• Treasury: Revenue is primarily generated from interest income on our investment portfolio, gains or losses from investment activities, and income from foreign exchange transactions. Major expenses comprise interest paid on borrowings and deposits. The segment is also responsible for managing and allocating customer deposits.

• Wholesale Banking: We provide credit facilities to corporate clients in compliance with RBI regulations. Revenue is derived from interest on corporate loans and fees from banking services, with key expenses comprising interest on borrowed funds, deposits, and associated operational costs.

• Retail Banking: We serve non-corporate customers through loans and deposit accounts, in line with RBI guidelines. Revenue is generated through interest income on loans and fees from banking services, with major expenses comprising interest on borrowings, deposits, and related expenditures.

• Other Banking Operations: This segment covers income from para-banking activities such as debit card services and distribution of third-party products, along with associated costs.

The performance and revenue contribution of each segment are presented in the table below:

Segment Results and Revenue

Particulars	2025-26	2024-25	% Change
Treasury
- Segment Revenue	405	535	(24%)
- Segment Results	(10)	74
Wholesale Banking
- Segment Revenue	103	142	(27%)
- Segment Results	36	23	55%
Retail Banking
- Segment Revenue	3,662	3,530	4%
- Segment Results	(426)	(905)
Other Banking Operations
- Segment Revenue	178	123	45%
- Segment Results	171	114	50%
Total Segment Revenue	4,348	4,329	0%
Total Segment Results	(228)	(693)

SUMMARY OF KEY FINANCIAL RATIOS

Particulars	2025-26	2024-25
Yield on Advances	15.7%	18.3%
Cost of Deposits	7.0%	7.5%
NIM	6.4%	8.1%
Cost to Income	71.6%	77.9%
CASA Ratio	23.9%	24.8%
Gross NPA Ratio	5.4%	6.9%
Net NPA Ratio	1.8%	3.0%
Provision Coverage Ratio	69.0%	80.5%
Capital Adequacy Ratio	22.2%	21.8%
Return on Assets	(0.6)%	(1.9)%
Return on Equity	(9.1)%	(22.8)%

INFORMATION TECHNOLOGY (IT)

We continue to advance our technology-led strategy, with innovation driving both product delivery and customer experience. Customers now access a unified omnichannel platform spanning a biometric-enabled mobile banking app, an upgraded internet banking interface, and seamless UPI-based payment services. The digital suite has also been extended to include real-time online opening of Fixed and Recurring Deposits, along with RuPay contactless cards and virtual debit card functionalities.

On the operational front, core processes such as account onboarding and loan underwriting have been migrated to AI-enabled, tablet-based systems. The Centralised Digital Credit-Processing Units (CPUs) have been enhanced, enabling faster, data-driven credit assessments and nearinstant disbursements. The adoption of e-signatures and digital KYC (e-KYC) has eliminated manual paperwork across retail and microfinance segments. Advanced analytics- driven underwriting has further supported the transition of group borrowers to individual lending products, deepening financial inclusion.

We have strengthened our service and collections infrastructure through a next-generation Customer Relationship Management (CRM) system and an integrated mobile-based repayment ecosystem. This digital-first approach is complemented by a phygital delivery model, enabling doorstep banking services in underserved rural regions. By combining biometric authentication with human-led engagement, we continue to expand access to secure, efficient, and inclusive financial services.

During 2025-26, we expanded our digital capabilities through the ESAF 2.0 StratoNext programme. This programme will be implemented in a phased manner and will go completely live by the end of this calendar year. This is a strategic initiative aimed at improving operational efficiency and scalability. It is a transformative program focused on strengthening risk management, regulatory compliance, data governance, and control frameworks. This transformation will enable better monitoring, improved auditability, and stronger compliance alignment, while supporting sustainable growth and improved customer experience.

RISK MANAGEMENT

Risk management is integral to the Banks governance framework and strategic decision making. The Bank operates in a dynamic environment and is exposed to various financial and non-financial risks. A structured risk management framework enables effective identification, assessment, monitoring and mitigation of risks while ensuring regulatory compliance and alignment with the Banks risk appetite.

The Bank follows a forward-looking approach to risk and capital planning through the Internal Capital Adequacy Assessment Process (ICAAP), in line with Reserve Bank of India guidelines.

Risk Governance

The Board of Directors has overall responsibility for risk oversight and approves the Banks risk appetite, policies and strategy. The Risk Management Committee of the Board

(RMCB) oversees implementation, supported by executive level committees such as the Credit Risk Management Committee (CRMC), Asset Liability Management Committee (ALCO) and Operational Risk Management Committee (ORMC).

The ICAAP serves as the cornerstone of the Banks risk and capital framework and covers assessment of Pillar 1 and Pillar 2 risks, capital adequacy under normal and stressed scenarios, stress testing and capital planning. Based on RBI classification norms, the Bank is designated as a "Simple Bank".

As on 31^st March 2026, the Bank maintained a capital position well above the minimum regulatory requirement applicable to Small Finance Banks. Capital planning is closely aligned with the Banks risk profile, growth strategy and stress testing outcomes, providing adequate buffers to absorb adverse scenarios.

Key Risk Areas

• Credit Risk

Credit risk is the most significant risk faced by the Bank. It is managed through comprehensive policies covering credit appraisal, sanctioning, portfolio monitoring, early warning systems and recovery mechanisms. During the year, the Bank continued its strategic shift towards secured lending, improving portfolio diversification and long term risk profile. Stress testing under ICAAP underscores the importance of sustained asset quality improvement and disciplined growth.

• Liquidity and Interest Rate Risk

Liquidity risk is managed through a robust ALM framework with daily monitoring of Liquidity Coverage Ratio (LCR) and periodic stress testing. The Bank consistently maintained liquidity levels above internal and regulatory thresholds. Interest rate risk is assessed from both earnings and economic value perspectives and remains within approved risk appetite limits under ALCO oversight.

• Operational and Market Risk

Operational risk is managed through Risk and Control Self Assessments (RCSA), Key Risk Indicators (KRIs), fraud risk management and business continuity planning. Market risk, primarily arising from treasury and investment activities, is managed conservatively and monitored independently, though no capital charge is currently prescribed for Small Finance Banks.

• Information Security and Cyber Risk

Information security and cyber risk are recognised as critical operational risks in an increasingly digital banking environment. The Bank has established a comprehensive information security and cyber risk management framework approved by the Board and overseen through the IT Strategy Committee of the Board. At the management level, the Information Security Governance Committee (ISGC), supported by the Chief Information Security Officer (CISO), oversees implementation of security controls and policies. A 24x7 Security Operations Centre (SOC) monitors the Banks systems and networks for potential threats and incidents. The Bank conducts periodic Vulnerability Assessment and Penetration Testing (VAPT), cyber security audits and disaster recovery drills to strengthen resilience. Information security incidents are tracked and reported through defined escalation mechanisms. The Banks overall IT and cyber security risk is assessed as low, supported by continuous monitoring and enhanced governance.

Pillar 2 Risks and Risk Outlook

In addition to Pillar 1 risks, the Bank actively manages Pillar 2 risks including concentration risk, strategic risk, reputational risk, compliance risk, human resource risk, outsourcing risk and sustainability risk through governance frameworks, policies and monitoring mechanisms, without the need for additional capital allocation.

Stress testing remains a key tool for assessing resilience and guiding capital planning. Going forward, the Bank will continue to focus on strengthening asset quality, capital buffers, portfolio diversification, technology resilience and governance frameworks to support sustainable long-term growth.

INTERNAL CONTROL SYSTEMS

The Bank has a well-defined and robust system of internal controls commensurate with the size, scale and complexity of its operations. The internal control framework is designed to ensure orderly and efficient conduct of business, safeguarding of assets, reliability of financial and managerial information, prevention and detection of frauds and errors, and compliance with applicable laws, regulations and internal policies.

The Bank follows three lines of defence model, which clearly delineates roles and responsibilities across the organisation.

Three Lines of Defence Framework

• First Line - Business Functions

Business and operational units act as the first line of defence and are responsible for adhering to approved policies, procedures and delegated authorities. They are accountable for identifying and managing risks inherent in their activities and ensuring compliance with internal controls in day-to-day operations.

• Second Line - Risk Management and Compliance The Risk Management Department and Compliance function independently oversee and monitor adherence to regulatory requirements, internal policies and the Banks risk appetite. This includes monitoring of credit, market, liquidity, operational, information security and other Pillar 2 risks, supported by structured tools such as Risk and Control Self Assessments (RCSA), Key Risk Indicators (KRIs), stress testing and policy reviews. The Compliance function ensures alignment with RBI guidelines and other statutory requirements.

• Third Line - Internal Audit

The Internal Audit function operates independently of business and risk functions and provides objective assurance to the Board and management on the adequacy and effectiveness of internal controls. The Bank follows a Risk Based Internal Audit (RBIA) approach, approved by the Audit Committee of the Board, covering branches, business verticals, critical processes, information systems and compliance areas. Audit observations are tracked through defined corrective and preventive action mechanisms.

Policy and Governance Framework

The Bank has in place a comprehensive set of Board approved policies governing credit, operational risk, market risk, liquidity management, fraud risk, information security, outsourcing, business continuity and compliance. These policies are periodically reviewed to ensure relevance in a changing regulatory and business environment.

Oversight of internal controls is exercised through the Board and its Committees, including the Audit Committee of the Board and the Risk Management Committee of the Board, supported by management level committees.

Information Technology and Process Controls

Internal controls are embedded within the Banks IT systems and processes through defined maker checker mechanisms, system based validations, access controls and audit trails. The Bank conducts periodic Information Systems audits, vulnerability assessments and penetration testing, and monitors IT and cyber risks through structured governance mechanisms.

Business Continuity Planning (BCP) and Disaster Recovery (DR) frameworks are in place and are tested periodically to ensure operational resilience during disruptions.

Review and Continuous Improvement

The adequacy of internal control systems is reviewed on an ongoing basis through internal audits, risk assessments, compliance testing and regulatory inspections. Audit findings and risk observations are reviewed by senior management and the Board level committees, and corrective actions are implemented within defined timelines.

Based on the assessments carried out during the year, the internal control systems of the Bank were found to be adequate and operating effectively, supporting the Banks risk management framework and governance standards.