AU Small finance has got RBI’s nod to become a universal bank and at the outset this is a victory for both AU SFB and the regulator. For RBI, this means the small finance bank idea has worked somewhat and for AU, it is the ultimate certificate — the regulator upping their trust in them. But let’s look beyond and beneath both for AU SFB and for RBI’s small-finance-bank experiment.First up AU SFB qualified for the upgrade and how: In 7 years, since FY18, its deposits have grown at a 50% compounded annual rate from ₹7,923 cr to ₹80,120 cr; its advances have grown at a 34% CAGR from ₹13,413 to ₹67,624 cr as of December 2024. Also, unlike other MFI-led small finance banks, AU SFB has had no major hiccups of bad loans despite, demonetisation, GST and Covid.So, how does life get better for AU after its new found status as a universal bank? The immediate advantage is that it will require less capital — RBI wants universal banks to maintain a capital adequacy of 9% while SFBs have to keep 15%. Effectively, AU Bank can make its capital work more thoroughly. Secondly, it won’t have to give 75% or even 60% to priority sector borrowers. Priority sector lending obligation falls to 40%. AU can sell the excess priority sector loans as PSL certificates and earn 4-5% more.
Thirdly, as it gets the stamp of a universal bank, it’s possible that its image improves and more savers and corporates are drawn to open accounts with AU, giving the bank a higher current and savings account float as also engage them in other chargeable services.Also read | AU Small Finance Bank shares surge 8% after universal banking license approval from RBIBefore we come to the challenges, let us look at what set AU apart from the other SFBs. AU is one of the few small finance banks that did not start as an MFI. It was an NBFC that sought an SFB licence. So, when it got the SFB licence, investors saw in it, the nimbleness of an NBFC and the advantage of a bank that can collect cheaper funds. For the first 2 decades of its journey, AU was a smart homegrown NBFC largely servicing Rajasthan, and to a small extent Maharashtra and Gujarat.
After getting the SFB licence, the scheduled commercial small finance bank
baseed in Jaipur has spread to other states, but 30% of its branches are in Rajasthan and another 25% in Maharashtra and Gujarat. But now as it becomes a universal bank, it will have to eventually move out of its comfort zone to the southern states where it will face intense competition from the national NBFCs Bajaj, Shriram and Chola. AU still rules the roost in Rajasthan, but investors will want to see if it can maintain its margins and claim market share when it competes with titans in other states.Likewise, it has been very good with micro loans, two-wheeler and tractor loans and commercial banking. But its credit cost is higher when it comes to credit cards. Investors will want to see if it can maintain its growth pace and its control over asset quality when it emerges out of its comfort zone of small scale commercial and business banking and tries to lend larger loans. Seasoned financier that he is, may be Sanjay Agarwal will pull it off. But that’s what investors and the regulator will watch.Separately, the graduation of AU Small finance Bank to a universal bank is a small feather in RBI’s cap too. Succeeding generations of RBI DGs and governors have pondered over whom to give new banking licences. Business families and conglomerates are a no-no because of the inherent conflict of interest they bring. The Nachiket Mor Committee in 2014 that recommended differentiated licences like SFBs and payment bank licences tried to push the envelope in new directions while recommending licences. They noticed that scheduled commercial banks with their higher employee and other fixed costs were unable to go far into the hinterland, but the growing number of MFI companies offered some hope.Although MFIs, like NBFCs only lent loans, the Mor panel hoped that in the process of lending, they could also encourage their customers to save and hence hit upon the idea of giving them small finance bank licences. Apparently so far that hope has not quite been realised since none of the MFI-turned-SFBs have succeeded in converting their borrowers to savers or creating enough retail savings deposits.Also read | Corporate finance is not our immediate agenda, says AU Small Finance Bank: Q&AThese SFBs still largely raise bulk deposits or borrow from the bond market and lend small loans in rural and semi urban areas. However, the SFB experiment has at least led to one of them, AU SFB, to qualify to become a universal bank.Many in RBI, including past executives, will fondly hope AU succeeds.
