ON APRIL 13 THIS YEAR, shares of AU Small Finance Bank surged 17% after Reserve Bank of India (RBI) approved re-appointment of Sanjay Agarwal as managing director and CEO for three years. This showed the faith investors have in the bank's 51-year-old promoter, a chartered accountant who dreamt big in his youth, tried his hands at businesses such as finance company, trucking, garment export and granite in mid-90s, only to realise that his real passion was finance. In early 2000, he exited his companies when his uncle offered him his finance company, LN Finco Gems Private Ltd., set up in 1996. It was rechristened as AU Financiers in 2005. The next big break came in 2009 when AU raised ₹30 crore from Motilal Oswal Private Equity. With over two decades of experience as a non-banking finance player, the company became AU Small Finance Bank on April 19, 2017, after getting a small finance bank licence from RBI.

Since then, there has been no looking back. The bank, which is primarily into vehicle finance, MSME/SME loans and credit to marginal farmers, has managed to increase its revenue at a compounded annual growth rate (CAGR) of 22.8% over last three years and 33.8% over last five years to ₹9,240 crore in FY23. Net profit grew at 28.4% CAGR over three years and 37.4% over five years to ₹1,428 crore, up more than three times from ₹382 crore in FY19. Net interest margin was 6.1% while gross non-performing assets (NPAs) and capital adequacy ratio were 1.66% and 23.59%, respectively, according to Capitaline data. This explains investor confidence in current management. On May 29, a Motilal Oswal brokerage report on the bank said the management has shown strong execution prowess. "We believe the long-term growth story remains intact," it added.

Agarwal, a first-generation entrepreneur, admits he was 'anxious' when his term was nearing an end (on April 18). An ardent cricket fan, who once wanted to become a cricketer, he takes a leaf out of Sachin Tendulkar's career to explain his anxiety. "When Tendulkar scored his 99th century, everybody started asking when he would score his 100th. He was fed up. He took some time to score it. People started asking me six months before my term was to end. But I was relieved when the announcement came," says Agarwal, adding he was confident about the approval considering the way the management led by him has built and run the bank. In just six years, AU Small Finance Bank has opened 1,015 touchpoints in 21 states and three union territories (as on December-end 2022), run by 27,753 employees, according to Q4, FY23 investor presentation.

The journey, however, has not been easy. "Demonetisation happened a year after we got the licence. When we started operations in 2017, GST (goods and services tax) was implemented. In 2018, the NBFC crisis hit, followed by the co-operative bank crisis in 2019. In 2020, we saw the mother of all crises, Covid-19. And the moment Covid-19 got over, we started feeling the heat of a war (Russia-Ukraine)," says Agarwal. In last one year, one of the biggest challenges has been rising interest rates. Beginning May last year, RBI has raised the policy rate, the repo rate, from 4% to 6.5%. This has been especially tough for small finance banks as their customer base, usually unbanked people on the sidelines of the financial system, are highly sensitive to rate hikes.

"We had to increase deposit rates by 150–170 basis points while lending rate was raised by just 50 basis points. So, that was a major issue," says Agarwal, adding that they decided to take a hit on balance sheet. "We are responsible bankers. We acted judiciously and took a hit on balance sheet rather than passing this on to customers," he says.

That said, Agarwal is of the view that India is poised for fast growth on account of gains from formalisation of economy, infrastructure push and creation of new businesses due to digitisation. "Public infrastructure push is helping small businesses on the ground. Infrastructure creation leads to demand for steel, cement and building materials. Small businesses around infrastructure projects need small credit lines. Digitisation is leading to investment in new businesses and e-commerce," Agarwal said, adding this is the high point for the Indian economy.

The management believes that the bank has now got scale and future strategy will be inclined towards building a sustainable growth model. "We want to do responsible, sustainable banking. Of course, assets will need to grow. But we will focus on how we can become a more powerful and impactful banking franchise," says Agarwal.

Interestingly, AU does not have any full form. It is a symbol for gold in chemistry and is derived from the Latin word for the precious metal —Aurum. Agarwal wants to make experience of customers and investors the gold standard of Indian banking and says his idea is to remain spotless and build more solid foundations.

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