Liquidity crunch, PCA restrictions on PSU banks helped small finance banks: Sanjay Agarwal, AU Small Finance Bank

Sanjay Agarwal, MD & CEO, AU Small Finance Bank, talks about the impact of liquidity church on his bank, expectations from the new RBI governor, products being offered from his bank and guidance for H2FY19 among others during a conversation with Anurag Shah, Zee Business. Excerpts: 

Q: Did the ongoing liquidity crunch in the banking and financial sector had any impact on your bank or not?
A: The crunch majorly had its impact on financial service providers like NBFCs, HFCs and MFI and those involved in short-borrowing and long lending. It didn’t have any impact on the banks but has helped the banks as several corporate treasuries have pulled out their money from AMCs and parked in the banks. For instance, we are a small bank but saw an increase in our deposits, in fact, we surpassed our November deposit targets as it grew 10 per cent more than expected. 

The crisis period provided lending opportunities to us as many NBFCs and HFCs were not lending. This was a reason that forced people to look towards the banks. In my opinion, the crisis was bad for the sector but was good for the banks. 

Q: Do you think that you will get momentum after things return to be normal?
A: The crisis has forced people to think about the kind of business model they should have where NBFCs and HFCs will have to figure out their lending process, that is, short-term or long-term lending. They will have to have long-term money for long-term lending. 

I think, the crisis - which was not an event but gave an opportunity to think to those companies – will give a good opportunity to the banks as we are regulated more and our ALM (Asset and liability management) is managed more by the RBI, which reduces risk at our end. Therefore, we are more confident as we move forward, and those sectors will have to rethink about the ways to grow. 

Q: What are your expectations from the new RBI governor?
A: See Anurag, I have the highest regard for RBI as an institution. We have been working with it for past 20-22 years and feel that it, RBI, has always worked to strengthen the financial sector of the country. Everyone has his own view and approach and we are supposed to abide by it, but, when seen in a long-term than we haven’t seen that any bank is failing in India or there is a financial crisis in India, till date. 
I feel, good works have been done to date, as we were given the license from changing ourselves from NBFC to a bank. Things were good earlier, but change is always welcome as every governor always comes with a thought process and an agenda.

This is a time when financial sector needs a new initiative and confidence and that’s why I believe that RBI and the new governor will provide some long-term sustainable transformation in the banking sector to cater to the long-term needs. 

Q: Several state-run banks have been sent into the RBI’s Prompt Corrective Action (PCA) list. Did their listing in the PCA list has benefitted small banks like yours or to the private banks?
A: See, the benefit of the bad events in the sector – which can’t give instant benefit to anyone - is a temporary effect. I feel, there is negativity in the banks that have been sent into PCA framework and that is a reason that customers are looking towards us. Thus, it is a temporary advantage and in a long-term, those banks will restart working bringing back the competition on our way. 
I feel business should grow due to the competition instead of getting benefits from the disadvantages. Your bank will stand with the support of the USP that is created due to the value proposition of the product that you have. 

Q: Do you think that PSU bank’s market share is slowly shifting towards new banks like yours, if yes, then let us know about the product that is not being offered by the PSU banks?
A: It is a natural progression. For instance, 12 new banks have become functional in the last three years and none of them is a PSU bank and this means that certain per cent of market share will come towards us. We are a new entity in the system and that is a reason that I can’t comment on the kind of share that we will have. But, Small Finance Banks (SFBs) space has received a total deposit of around Rs5,0000 crores, of which Rs12,000-15,000 crores have been received by us. Thus, this deposit has come out from someone else’s market. 

I feel the PSU banks will face tough competition from private banks in future. And, this competition is beneficial for the country as it will enable banks to provide new products to its customers and value them. 
When it comes to AU Small Finance Bank, then we are offering an interest rate of 6.5% on savings and 7-8% on fixed deposits. We are exile as the young population has been employed at our place. These advantages are being planned and offered after looking at the customers that we are serving. 

Q: Do you think that investors of your bank willing to exit from the bank or wants to stay with it?
A: It is a difficult question to answer as everyone has his/her own priorities for investment and pulling out the money. But, we want to create a good bank with a good balance sheet and growth. We want to be a responsible banker in the system offering value propositions to its customers and we are working. In addition, I wish that our investors continue to be with us and continue investing in our system for the next 20-25 years so that we can provide handsome returns to them. We are working with an aim to create a customer-oriented highly governed bank. 

Q: Let us know about the products that are being offered by AU small finance bank? You have also expanded your bank by opening new branches. 
A: Our NBFC branches have been converted into our bank branches. But, Bank is a huge platform, where we are just not engaged in lending, but now, we are taking deposits, we are making payments, we are into collection among others. Our offerings are a natural product of the bank system as the customer has a habit of asking for such facilities, like insurance, gold loans and personal loans among others, when they visit our branches. You will have to have a holistic approach while serving a customer to be a good bank. 

The main products that we have been doing since the past two decades are vehicle finance, where we are financing two-wheeler to 22-wheeler. Being a small bank, we want to have 50% of our loan accounts below Rs25 lakhs and it stands around 60% at present. Therefore, we offer loans below Rs25 lakh to businessmen, traders and service enterprise among others. In fact, it has a 40% contribution in our loan books. Now, we have started home loan facility at our bank. We have introduced 28 products in 18months of our existence and this is something that will develop a sense that we are a true bank.

Q: You said that 40% of your loan book belongs to small traders but several banks in their quarter results have said that they have felt pain in their SME, MSME and trading loans. So, should we think that you to have faced such pain at your bank?
A: No. We have offered our loans to businessmen, traders and service enterprises. I feel you are talking about the pain that was associated with the GST and it is a settled case by now and has adopted it. I can say that our asset quality has improved in the past 18 months and I feel that we should have a special focus in the area as it is offering new opportunities.  

Q: Your bank has performed well in H1FY19. Let us know about the guidance for H2FY19?
A: I think that we will grow by 35-40% due to 28 products that have been launched by us. But, this is not one-way growth and include certain things like asset quality, IRR and ROI. 

Q: Let us know about the capital that is available with your bank and if you looking forward to new funds? 
A: We have raised funds twice in the past nine months and they include Tier I and Tier II. We raised Tier I from Temasek, a global investment company headquartered in Singapore by offering 5 per cent of our stakes to them. And, we have raised Rs500 crores under Tier II in recent past. We have a Capital of around 18% and I feel that this fund is enough to keep AU Small Finance Bank functional for the next 18 months. The second instalment from Temasek and internal profits will enable us to function till March 2020. Further, we will look at the kind of growth that we have achieved in these 18 months and plan the future, where we will need refunding between 2020-21. 

Q: Will this fund will be used for expansion purposes only?
A: Yes, it is a natural process. You need to raise tier I or tier II when you want to grow by 40% with a profit of 15%. So, every penny of the capital will be used for funding this growth. 

Q: Name the geographies where you will be expanding your business? Provide the number of functional branches of your bank?
A: We have 400 branches and 100 asset centres at present and we have no plan to expand in FY19. But, we have sent a proposal to RBI for the creation of 100-125 new branches. Additional 100 branches will be launched within 18 months after March 2019 after the proposal is approved by the RBI. Interestingly, maximum branches will be opened in the localities where we are functioning at present. As we have a strategy to go deeper as we are engaged in financial inclusion and have an objective of offering small loans. But, we also have an intent to have a pan-India presence and that’s why we are willing to go to certain markets like Bangalore, Chennai, Hyderabad and Kolkata as our presence in these cities will help us in creating a future market for our business. 

Q: Are these 400 branches are based in rural or urban areas?
A: 60% branches are based in rural India as we have always said that SFB (Small Finance Bank) is a Robinhood model under which we collect money from the big ones and distribute among the small ones. In fact, we raise money/deposits from big cities and lend them in villages. So, we are working on the same model, but it is equally distributed at present as 25% our branches are based in unbanked places that didn’t have any bank branch till date. We are developing our bank from the same perspective. 

Q: You have a special focus on digitisation. Let us know about the size of the digital business of your bank? 
A: Digital is the future of the banking sector. It will allow you to optimise your channel and create your channel at a cost-effective level. In fact, the new generation is turning up to be tech-savvy and that is a reason that we want to be equally available on both levels, .i.e. traditional brick and mortar level as well as the digital platform by offering internet banking, mobile banking, online lending, and desists among others. We are working on it and will try to create a good digital bank in the next 18 months so that it can contribute to AU’s growth in the future. 

Q: Name the geographies where the bank, AU Small Capital Bank, has a strong presence at present?
A: See, Rajasthan is our parent and Jaipur is our base and this is our biggest forte. This is a where we are growing and launching our products. Apart from this, another region is in the western region of India and they include Gujarat, Maharashtra, Madhya Pradesh and Chhattisgarh, where we are quite active as a franchise. We are also developing new areas in NCR, Punjab, Haryana and Himachal Pradesh. Currently, we have an idea of being concentrated in North, Centre and West India only. But will create our presence in major cities with an eye on the future market. 

Watch this Zee Business video

#Exclusive | नकदी की कमी से कैसे छोटे बैंकों को हुआ फायदा जाना अनुराग शाह ने AU स्मॉल फाइनेंस के संजय अग्रवाल से खास बातचीत में।@AnilSinghviZEE @SwatiKJain @anuragshah710 pic.twitter.com/BhKbzSdqhA

— Zee Business (@ZeeBusiness) December 17, 2018

Q: Talk about the product offerings of AU Small Finance Bank that is being provided to its customers?
A: We want to be a customer-centric bank and that’s why our products are being created by keeping customers in mind. In the process, we want to know the nature of employment of the customer, .i.e., are you a salaried person or a self-employed person. As salaried people will look ahead for home loans, digital consumer durables, personal loans among others but a self-employed person will look towards business loans and loans for commercial vehicle among others. In fact, we want to fulfil almost everything that a customer will need in his life cycle from fund-based solutions to non-fund based solutions like insurance, securities, pensions, lockers among others.