MC EXCLUSIVE May engage with regulator to understand NOFHC requirement: Sanjay Agarwal, MD & CEO, AU Small Finance Bank

Sanjay Agarwal, Managing Director & CEO, AU Small Finance Bank

The Reserve Bank of India recently upgraded AU Small Finance Bank to universal bank. With the in-principle approval coming through late Thursday evening, and the bank guiding for 18 months tenure to transition into a larger outfit, Sanjay Agarwal, MD & CEO, of the bank said in terms of products and operations there may not be an immediate change in the manner of functioning. Speaking exclusively to Moneycontrol, Aggarwal said he will approach the regulator soon to understand why the requirement to convert his stake into a non-operative finance holding company was imposed as a licensing condition.

Edited excerpts:

Right now the promoters’ stake is held directly in the bank. Why did RBI mandate NOFHC (Non-operative financial holding company) structure for the universal bank conversion?

Converting promoter’s stake to NOFHC is a precondition to the (universal) license as per the in-principle of the RBI. We need to figure out why this condition is imposed, because we just received the approval last night. I don’t think there is any scope for negotiating with regulator on this. I might want to approach them to know the reasons. Having said that, I figured out the structure before (the license was received). In that sense the structure better as it allows me to express myself in other sector too.

Now that AU is a universal bank, are you looking at other avenues?

The bank will have its own journey. There will be much more to offer. The structure will allow me to explore options.

Will you want to be the CEO of AU Bank till 2032 or longer?

I don't think there is a different tenure for universal bank and SFB. It (tenure) is a cumulative one, and I don't expect that I will be continuing post 2032. I have a 12 plus three years period to function as the CEO. My 12 years tenure concluded in 2029 and plus three years only when RBI allows me. Of course, I will push my case, but it's up to the regulator.

Whether the merger approval with Fincare or Universal bank approval, you've got both at shortest span of time. What in your view must have really appealed to the RBI to enable this?

It’s the spirit of banking and we are actually fulfilling this. The whole criteria of becoming an SFB, was fulfilled by us even before we became SFB. The entire frame of SFB is that we have to be inclusive financing on ground. For instance, our share of priority sector lending was 85 percent instead of 75 percent. Share of banking in unbanked segment is at 30 percent. Right now, we remain committed to this SFB agenda. Also, we never had an had an any issue around our governance. We never had been penalized by RBI for anything. I think that (also) really helped for RBI to form a view that this team can be trusted. I don't I have any kind of readymade formula that people can follow (to get fast approvals), but I think the overall you have to be on right path.

Are you formally shifting your head office from Jaipur to Mumbai and is that as part of license condition?

This is the our requirement as a business model, not as license requirement that we are moving the head office.

When you were an SFB you didn’t have to play the rate game. Now, you aren’t going to be within the top ten private banks. What would your strategy be, especially on the liabilities side?

I think our whole focus as a bank should be to raise retail deposit at a lower cost. That only will make us sustainable. I would say that in next five years, our cost of funds should be below the then prevailing repo rate. We need to do that and to do that continuously, we need to figure out a way. We need to build our brand, trust, and product and services in that manner. If we want to sustain for the long term, our cost of money has to be below the below repo rate. Otherwise, any franchise cannot be sustainable.

Mass market, affluent, or, mass affluent, which would be your preferred categorization?

For deposit it will be mass affluent and for our borrower, it would be the public at large. In terms of products, the universal bank, will continue with the current suite of products.

Any lessons that you learnt from the credit card NPA episode?

That growth should be measured.

It’s a huge statement coming from you…

I want to give this credit to RBI, that they pushed us not to grow too fast. I think their advice was core to becoming a universal bank and I respect it.