We have to play it right and convince people they can trust us: AU chief

I think the momentum will be huge in our favour be it in terms of deposits or loans. We just got the license last night and the kind of curiosity I am seeing around this is huge, said Agarwal

The Reserve Bank of India (RBI) has approved AU Small Finance Bank to convert into a universal bank, and has asked the lender to transfer promoter stake into a non-operative financial holding company (NOFHC) before commencing operations, which is to be done within 18 months. The Jaipur-based lender’s managing director and chief executive officer (MD & CEO), Sanjay Agarwal, and his family hold a 23 per cent stake in the bank. In an interaction with Subrata Panda and Manojit Saha in Mumbai, Agarwal said he did not intend to increase his promoter shareholding to 26 per cent from 23 per cent now, and did not wish to continue as the bank’s MD & CEO beyond the 15-year regulatory limit, having already served eight years in the role. Edited excerpts: 

What is the big benefit now that you have become a universal bank? 

I think the momentum will be huge in our favour — be it in terms of deposits or loans. We just got the licence last night, and the kind of curiosity I am seeing around this is huge. I would say that our cost of funds, which is so important to run a sustainable franchise, will moderate now. That will be our focus because a universal licence gives you that positioning. With this validation from the RBI, I think we have to play it right and convince people that they can trust this bank and that they do not have to ask for higher rates, as their money is safe and secure. Plus, we need to sell to our customers that our services are better, so that our cost of funds declines. Once it comes down, 90 per cent of the problem is solved. Our fixed deposit rates are 6.75 per cent, and I need to bring them down to the 5-5.5 per cent level. A universal banking licence will allow me to do that. 

But it will not happen overnight. It’s a three-to-five-year horizon, but at least we are on the path.

 

The RBI has given you 18 months to transition into a universal bank. How do you plan to achieve that? 

That’s the outer limit set by the RBI. We need to figure out the structure. We just got the licence last night (Thursday).

 

What is the structure the RBI has suggested? 

The structure suggested by the RBI is that my shareholding in the bank, which is in my name, my mother’s name and my wife’s name, should go into one company — NOFHC — and that NOFHC company should hold the promoter shareholding in the bank. While the current structure is good for me now, it does not free me (or my family) to invest in, say, an insurer or asset management company (AMC). So, I think the RBI-proposed structure will not only safeguard the bank but also allow the promoter to do many other things. 

 

What is the vision for AU Bank? 

It should be the most admirable retail franchise in the country.

 

What kind of margins are you looking at now that your cost of funds will come down? 

In the next two to five years, our return on assets (RoA) should be around 1.8 per cent, from 1.5 per cent now. This is achievable because the cost of funds will come down, and there will be some savings in operational expenses as well. I strongly believe the market will also improve, so our credit cost can also come down.

 

The priority-sector lending (PSL) targets will come down to 40 per cent now. How will that help you? 

This will help us from an ease-of-doing-business perspective. Now, the definition of PSL is so wide that there is no requirement of surplus. The requirement is only in the small and marginal farmers (SMF) segment or agri segment, which is similar for me and other banks. So, I don’t have a surplus around my SMF or agri piece. The surplus is around the general PSL. And general PSL has no demand. But it will ease my way of doing business. Definitely, it will be advantageous for us, but not in the monetary sense.

 

Will you raise promoter stake in the bank to 26 per cent? 

To go up to 26 per cent, I would have to take loans and then expect that the share price will go up to repay those loans. I focus more on the bank’s growth than on my personal growth.

 

Will you raise capital? 

It will be done in the due course of business, but not as of now.

 

What kind of growth do you envisage in the next three years? 

It depends on the economy because, at the scale we are at, economic growth affects us. I believe AU, at the current scale, should be growing at twice the nominal gross domestic product every year.

 

Will you serve 15 years as MD & CEO of the bank? 

I don’t expect that. An executive should not be MD & CEO of a bank for more than 15 years. An SFB is also a bank. So, we are working on our succession planning.

 

In the retail segment, what will be your focus areas? 

Vehicle loans, mortgage loans, and gold loans are the key focus areas for us. And within mortgages, loans against property (LAP) will also be a focus area.

 

Will you enter the large corporate segment? 

To enter the corporate segment, you have to have a lower cost of funds. My cost has to go below 5 per cent. As of now, it’s 7 per cent. And, overnight, my cost of funds will not go down. We are already in the mid-corporate segment.

 

What are your plans for your wealth business? 

We will do that because it’s a hook for our depositors. It adds to our offering. We don’t have an ambition to have a standalone wealth business. It’s to help our depositors to stick with us, take advantage of wealth advice, and bank with us.