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Interview | AU comfortable as small finance bank, ready to convert to universal bank if RBI wants, says Sanjay Agarwal

"There are certain challenges like inflation, interest rate cycles, geopolitical issues, but I don't think those are bigger than what we have faced in the last two years," Agarwal said.

April 27, 2022 / 05:10 PM IST

Jaipur-based AU Small Finance Bank on April 26 reported that net profit more than doubled in the January-March quarter from a year-ago period, led by loan growth, stable margins and asset quality. Profit jumped 105 percent to Rs 346 crore in the period, the lender said.

In a conversation with Moneycontrol, Managing Director and Chief Executive Officer Sanjay Agarwal said the trend is likely to sustain because AU Small Finance expects FY23 to be more stable in terms of both asset quality and loan growth.

​The bank is targeting 35-40 percent growth in deposits and a 30-35 percent increase in loans in the current fiscal year, Agarwal said, adding that a new and more conservative provisioning policy will ensure asset quality is stable.

Agarwal also opened up on whether the lender will apply for a universal banking licence now that it has completed five years as a small finance bank, and shared information on capital raising and expansion plans.

Edited excerpts:

What is your business outlook for FY23?

We want to create a granular, scalable, and low-cost deposit franchise and we are on it. Second, we want to really expand and focus on our present product lines, because we have around 15 asset lines to build from.

There are certain challenges like inflation, interest rate cycles, geopolitical issues, but I don't think those are bigger than what we have faced in the last two years. So, AU should show decent growth in deposits, which is our prime objective. We really want to grow that (deposit) segment around 35 percent to 40 percent. In terms of assets, we really want to grow 30 percent to 35 percent. And profit should be north of 25 percent.

You said the bank will focus more on building on existing product lines so will vehicle loans continue to be major growth driver? 

The wheel industry was suffering, with a lot of challenges, but now because of the whole turnaround in the economy, there is a lot of demand.

The income level has gone up and that is why the personal vehicle segment is also performing well. The electric vehicle push, scrap policy, manufacturing-linked incentives given by government, these are all helping the industry to grow...I hope that vehicle industry will have the major growth share in our journey.

What are the other key focus areas in FY23?

Housing loans. You know how the real estate sector has turned around. Housing will become a major force in our whole product range. I am hoping that housing can grow exponentially for us in next five years as it is a very amazing product line. It is more of a relationship product than a transition one.

Further, lots of SMEs (small and medium enterprises) and MSMEs (micro, small and medium enterprises) are now looking to expand, and I think we can serve these entities well through our business banking and agri banking products. Overall, to be very honest, we have around 15 product lines; everyone is in nascent stage apart from two. Thus, each product line can grow.

How many cards are you looking to issue this year? 

We might do around 300,000 plus credit cards this year. We might install more than 700,000 UPI-backed QR codes. We might open video banking accounts to the tune of 300,000; 75 percent of our customers use our app or the video banking service so there are a lot of data metrics which we are tracking.

And I believe that if we do this for next maybe 3 to 5 years, AU will emerge as one of the best tech-led banks of this country.  

Any capital raising plans in this fiscal year to fund your growth strategies? 

We are in this amazing growth phase, the country is in a growth phase and we are building ourselves so well and are into a business where capital is required day in and day out so we will be raising capital in this fiscal.

Can you provide the size of the fund-raising and  a timeline?

That needs to be worked out because we have just finished this quarter (Q4FY22). Actually, it will be a combination of Tier-2 and Tier-1 bonds. So, we need a little bit more time to really finalize them out.  

AU’s share of CASA (Current Account Saving Account). deposits is lower at 37 percent. Where do you want to take it by this fiscal end?

We will try to increase it because CASA is the soul of  deposits. So, we will try to make it north of 40 percent.  

Interest rates are expected to harden. What impact will this have on your margins?

You will appreciate that our cost of money is going down. We were decreasing our yield because that is the way banking should be. But now that the interest rate cycles will go up, there is a possibility that we will increase our lending rates because these markets are not interest-rate sensitive.

I strongly believe that our cost of money still has some room to get repriced on a downward side. Thus, on an overall basis I think our NIM (net interest margin) should be protected this year.  

So the NIMs will be protected at 5.7 percent?

Yes, I strongly believe that. We have to really see, maybe another quarter or so, but I strongly believe that our NIMs can be protected.

How is your restructured book performing?

Our restructured pool of standard assets is around 2.5 percent of our portfolio. And gradually, maybe 15 percent-20 percent will become NPAs (non- performing assets) and rest will be standard and that is what the data shows. We need to give it more time because we are just coming out from a good nine-month period.

Maybe in another two, three quarters, we will be able to figure out at what is the real impact of the pandemic and what would be the real NCLs (non-conforming loans) but I am really confident that we have covered it up very well.  

Has this been a trigger for you to adopt a more conservative provisioning policy?

I strongly believe the way that these last two years have passed, with the COVID-19 pandemic and geopolitical issues still persisting, whenever you get the opportunity to really strengthen the balance sheet, we should do that.

If asset quality remains strong and the PCR (provision coverage ratio) remains strong, that is the most comforting factor for any bank. And we got this opportunity this time (in Q4) because we had to reduce our COVID-19-related provisions and we used them to really buffer our PCR. Also, by doing this, we actually aim to really manage our growth trajectory. We should not irrationally grow ourselves.

So will the PCR now rise further from 75%?

No, I think it will be like this to be very honest because the older stock will get liquidated because we are doing secured financing right. Thus, the older stock will get resolved and the newer NPAs will come, which will attract a lower rate of provisioning. So I believe it will remain in the same bracket.  

Any guidance that you can give on asset quality for FY23?

We should be in the range of maybe 1.75 percent or 2 percent (for gross NPAs). The net NPA would be the same at 0.5 percent.  

What are your expansion plans this fiscal year?

Other than the Northeast and maybe J&K, we want to be pan-India within the next 2 years. At least one branch in every state. For this year, the expansion plan is still being worked out and we will let you know once it is finalized.

What is your take on digital banking units? Are you looking to set up some units?

Yes. It is a very progressive idea. And we will do that.  

Lastly, now that you have completed five years as a small finance bank, are you holding discussion on applying for a universal banking licence?

We are executives, right? In cricketing parlance, we just have to come out and play in whatever format the regulator has asked us to and we will perform to the best of our capabilities. Beyond this, is up to the selector to decide which platform they want us to play in.

We are really comfortable in an SFB avatar but if regulator wants us to play in the commercial field, we will happily go there.

Piyush Shukla
first published: Apr 27, 2022 05:09 pm