We are back with original NBFC avatar rather than a bank avatar: Sanjay Agarwal, AU Small Finance Bank

Sanjay Agarwal-1200

We were a non-banking finance company (NBFC) for 22 years. It takes some time to understand this platform, the challenge, opportunity as well as the execution. Q3 was one of the events which was beyond our control. But the team has shown a lot of resilience and character in Q4 and we are back with the original NBFC avatar rather than a bank avatar.

Our focus is more on inclusive banking in semi-urban, rural areas where we compete with NBFC. We have to build a decent franchise around deposits because if you cannot build deposits, there is no fun running a bank. The overall matrics in terms of our growth around asset is around 50%. This is because of a lower base and incrementally we build around Rs 70,000 crore of deposits in two years, which is largely funding our incremental assets.

Our yield is shaping up well. Our opex which was on a higher side, is very natural because of its transition time. As a bank, we are shaping up well and in quarter one of this year, post election, a lot of reforms and a lot of focus on businesses should come back. The best time of AU will start from may be this year end or maybe Q3, Q4 of this year. I should congratulate the entire team, the stakeholders, the customer base to support us in the journey.

Your ROE and ROA will settle in FY20?

Yes, more or less. This transition will take some time and there are a lot of moving items which we do not know, as an executor of this bank. But we have to take it every day. Largely, we have addressed everything to the extent. If we are able to figure out that there are no surprises at all in our journey in terms of regulation or anything else which we do not know. I am not talking about the asset quality. I am not talking about the cost of deposit. I am not talking about the operation cost. It is beyond that. Our trajectory is largely settled.

What is happening to pure retail NBFC business?

Our DNA is NBFC. Our strategy is very simple. We do not want to compete for the higher-end customers. We are operating largely the way we have operated in last 20 years. Our business is growing by 35%. Our SBL business is growing by 40%. Our other retail aspects like housing loans, the consumer durable, the other things are growing in a pretty decent manner.

We really want to focus on retail and SME and mid corporates. It is more of a long-term strategy for us. We are actually working on our digital asset lending also. That should shape up in next 8 to 12 quarters and that will remain our focus. The advantage for us being a retail space is you can price your assets and can increase your yield. You have to de-risk yourself from any asset or geographic concentration. We do not have a large book. It is pretty good to be in that space.

The whole focus is on building retail deposits and that does not come easy. It has to be more go to market strategy. We need to build right technology, right people, right product offering and value proposition for people to come and bank with us. Eventually, we can do that because we have built retail in last 25 years. It might take some more time and the challenge around deposit can be at the cost of deposits which beyond a point is not in our hand. It is more market driven. I believe that we will achieve all these things barring a couple of more challenges which we need to address on a timely basis.

You are sounding very optimistic and confident. Does that extend to your CASA growth as well? I understand the CASA ratio at about 21%. How hungry are you for bettering the overall CASA growth?

I will also want to give you one more data point, current account (CA) is a very different story. It does not come easy because we need to build a brand. We need to build value proposition to build CA. The journey around CA will take more time.

But savings account (SA) in retail deposit is our prime focus. Our Rs 17,000-crore book has a consistency of around 40% and that is the way the whole focus is. SA and retail deposit do not have much difference in the cost of fund also. But this only will come when our whole retail franchise will shape up that means we need to have more people on the ground and we need to build the brand.

NBFCs’ growth was at the cost of PSU banks which did not have ability to lend. Private banks were busy deleveraging their NPAs. Now CASA ratios have stabilised for the large two or three banks. Could that have an impact on growth and on your spreads?

Which are the large private sector banks you are talking about? We do not want to compete with the big guys because they are not in the markets which we operate as an asset. Our deposits in the last two years is around 7.2% which is not largely elevated. Private sector banks also maybe operating around 7%.

I do not believe that we are running on a higher deposit cost and it is a phenomenon because of the recent events but we have the ability to deploy at 15% plus. People have to back us and see whether AU has the ability to deploy this kind of money at this rate. If we can decode this lending more on these markets, then we are not too worried about our cost of deposits.

You seem to be clearly saying that you are in investment mode. What strategy are you following and also are you not taking high risk to deploy at 15% plus?

One thing which is very evident in the AU journey is we challenge the status quo. In terms of our branch expansion, I personally believe that the old traditional way of building branches are not the right way.

We want to explore more. We want to build very deeply penetrated low cost branches, maybe owned by us or through BC or maybe around some other method. It may be digital method. Our cost of investment as we move forward will not be so high. We want to take every step after a lot of discussion and a strategy around it and I believe that we are walking on that path.

We have not opened a single branch in the last two years and we have grown our book to Rs 17,000 crore and we are growing our asset by 50%. So the need of the branch, the need of investment has to be on table rather than deciding on just on the feedback or on the push back from some quarters.

Our cost of income is around 60% and I believe that that has been peaked and from here onwards. cost of income will go down. That is the way we want to build ourselves in terms of branches and look after our opex.

More importantly, there is also a wrong perception that anything more than 15% is a risky asset. We are in this business for the last 22 years. Our NCL for this year is also close to zero. I do not think that it is about the pricing which makes the account risky or non risky. It is about how you adjust the customer, how you deliver the loan and how you collect the money. The whole design in the organisation works in a certain way.

What about corporate retail growth? What is the strategy and projections here?

It has a base effect but largely we have to do 75% priority sector. But 50% loan is lesser than Rs 25 lakh, These two principles will drive us more retail than a wholesale. In our case, 80% has to be retail and 20% has to be SME and mid corporates.

In AU, the promoters have a very large holding. Over the years, the stake has got diluted. As you grow, you will be raising more capital. Are promoters committed to maintaining their stake at the current levels?

No. I have already shown to the corporate world that I am not too sticky around my stake. For me, the bank, the franchise is important. We will do whatever is required to build this franchise. There are certain RBI guidelines. My 26% stake has to be locked in till 2022. Post that it is free. We can raise any amount of capital and at a personal level, I will do whatever is required to build it forever.