In an exclusive conversation with Moneycontrol, Sanjay Agarwal, Managing Director and CEO of AU Small Finance Bank, shared insights on the bank’s transition to a universal bank, the challenges it faces, and his future plans. One key point that stood out was Agarwal’s intention to approach the Reserve Bank of India (RBI) to understand why it mandated that his stake in the bank be converted into a Non-Operative Financial Holding Company (NOFHC) structure.
Why Was the NOFHC Structure Imposed?
Agarwal confirmed that converting the promoter’s stake into an NOFHC is a precondition for AU Small Finance Bank’s upgrade to a universal bank, as per the RBI’s in-principle approval. However, Agarwal expressed his intention to approach the RBI soon to understand the rationale behind this licensing condition. He admitted that while the imposition of this structure might not be negotiable, it was something he planned to inquire about to gain a better understanding. He also pointed out that the NOFHC structure might offer flexibility, allowing him to expand into other sectors.
Future Plans for the Bank
Now that AU Small Finance Bank is officially a universal bank, Agarwal hinted at exploring new avenues for growth. While he mentioned that there wouldn’t be an immediate change in products and operations, he expressed excitement about the opportunities that come with the universal banking status, which will allow the bank to explore a wider range of products and services.
Tenure as CEO and Bank’s Strategy
When asked about his tenure, Agarwal clarified that he would be serving a 12-year term as CEO, which ends in 2029, with a potential three-year extension if granted by the RBI. He acknowledged that he would push for the extension but emphasized that the decision ultimately lies with the regulator.
As AU Small Finance Bank transitions from an SFB to a universal bank, Agarwal reflected on what might have appealed to the RBI for the swift approvals. He attributed this to the bank’s commitment to inclusive financing and governance, citing that AU Small Finance Bank had already met the criteria for becoming an SFB before even applying. The bank’s dedication to priority sector lending (85% compared to the required 75%) and its contribution to banking in the unbanked segment (30%) were also factors that strengthened the bank’s case.
Moving the Head Office and Business Strategy
Agarwal confirmed that the bank will be moving its head office from Jaipur to Mumbai, a decision aligned with its business model rather than a licensing requirement. This shift is part of the bank’s broader strategy to grow its operations in line with the demands of universal banking.
On the subject of liabilities, Agarwal emphasized the importance of retail deposits at lower costs as the bank’s strategy moving forward. He stressed that for long-term sustainability, the bank must aim to keep its cost of funds below the repo rate in the next five years. Building brand trust and offering innovative products and services would be key to achieving this goal.
Target Market and Lessons Learned
Agarwal also shared his view on target customer segments, saying that for deposits, the focus would be on the mass affluent category, while for borrowers, the bank would serve the public at large.
Reflecting on the credit card NPA episode, Agarwal admitted that one key lesson was the importance of measured growth. He credited the RBI for its guidance in urging the bank to avoid rapid, unchecked expansion, which ultimately played a crucial role in AU Small Finance Bank’s successful transition to a universal bank.
Conclusion
With AU Small Finance Bank now poised to expand its horizons, Sanjay Agarwal’s leadership seems focused on sustainable growth and strategic decision-making, while navigating the challenges posed by the RBI’s conditions and the evolving banking landscape.
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