Au Small Fi­nance Bank to lever­age its NBFC ba­sics

Banking Frontiers - - Highlights - Mo­han@bank­ingfron­tiers.com

Au Small Fi­nance Bank is poised to start its jour­ney in the bank­ing do­main and its MD and CEO San­jay Agar­wal is con­fi­dent the bank will make a mark

Au Small Fi­nance Bank is poised to start its jour­ney in the bank­ing do­main and its MD and CEO San­jay Agar­wal is con­fi­dent the bank will make a mark

From be­ing a com­mer­cial as­so­ciate of a lead­ing pri­vate sec­tor bank for orig­i­nat­ing and ser­vic­ing ve­hi­cle loans in 2000 to a full-fledged small fi­nance bank in 2017 is an en­vi­able track record for any en­tity in the fi­nan­cial ser­vices do­main. That’s ex­actly what Au Small Fi­nance Bank has achieved in some­what a record time­frame. Start­ing as L N Finco in Jaipur and re­nam­ing it­self as Au Fi­nanciers (In­dia) and sub­se­quently ob­tain­ing a NBFC li­cense, Au Small Fi­nance Bank is the only NBFC to be granted a small fi­nance bank li­cense by RBI.

The bank com­menced its op­er­a­tions in 1996 in Jaipur as a fi­nan­cial firm and later got its as­set fi­nance NBFC li­cense in 2000. It won the in-prin­ci­ple li­cense to op­er­ate as a small fi­nance bank in De­cem­ber 2016 and started op­er­a­tions in April 2017.

The bank does not in­tend to take things lightly. It plans to make its pres­ence felt as a bank, es­pe­cially ser­vic­ing the dis­ad­van­taged and low-in­come seg­ments of the so­ci­ety and in pro­vid­ing cus­tom­ized so­lu­tions for th­ese seg­ments us­ing a tech­nol­ogy-led model.

Says San­jay Agar­wal, MD and CEO of Au Small Fi­nance Bank: “We in­tend to lever­age our ca­pa­bil­i­ties as a for­mer as­set fi­nance NBFC, in­clud­ing our branch net­work, cus­tomer base, low cost hub-and­spoke model and the lo­cal know-how in the ge­o­graph­i­cal ar­eas in which we op­er­ate, for our SFB op­er­a­tions. As an SFB, we in­tend to strate­gi­cally ex­pand op­er­a­tions by of­fer­ing a di­verse suite of bank­ing prod­ucts and ser­vices at our branches.”

SIN­GLE PLAT­FORM

Agar­wal is con­fi­dent that the op­er­a­tional ex­pe­ri­ence that the com­pany has as an as­set fi­nance NBFC, as well as the NBFC cus­tomer base will en­able it to de­velop bank­ing op­er­a­tions to cre­ate a sin­gle plat­form for mul­ti­ple fi­nan­cial prod­ucts and ser­vices. “Our tran­si­tion into an SFB has syn­er­gies with, and de­mand from our NBFC cus­tomer base en­abling them to open their bank ac­counts and re­ceive de­posits from them,” says he.

He fur­ther ex­plains: “We be­lieve we can lever­age our ex­pe­ri­ence in our NBFC busi­ness lines, brand and re­la­tion­ship with cus­tomers and fi­nan­cial in­sti­tu­tions to build our pres­ence in the bank­ing sec­tor. We also be­lieve that we can gain ac­cess to low-cost funds in the form of sav­ings and cur­rent ac­count de­posits as well as term de­posits, which would oth­er­wise not be ac­ces­si­ble to us as an NBFC. We have ob­tained a sig­nif­i­cant un­der­stand­ing of low and mid­dle-in­come cus­tomers through our NBFC op­er­a­tions and we have ex­panded and strength­ened our busi­ness model to of­fer bank­ing ser­vices by lever­ag­ing our un­der­stand­ing of cus­tomers and as­set lend­ing strengths to suc­cess­fully op­er­ate the bank.”

IN READI­NESS

Agar­wal says for the bank op­er­a­tions, the com­pany has de­vel­oped and set up an ad­di­tional branch ar­chi­tec­ture, im­proved tech­nol­ogy back­bone in a phased man­ner and es­tab­lished con­sumer branch foot­print in the ge­o­graph­i­cal re­gions in which it con­ducted NBFC op­er­a­tions. “We will con­tinue to fo­cus on our go-to-mar­ket ap­proach to in­crease cus­tomer base, im­ple­ment cus­tomer reach pro­grams and will en­cour­age all NBFC cus­tomers to open bank ac­counts with us. Our fo­cus is on build­ing long-term re­la­tion­ships with our cus­tomers and ad­dress­ing spe­cific re­quire­ments in a par­tic­u­lar re­gion. We have de­vel­oped a strong con­nect with cus­tomers over 20 years of our op­er­a­tions as an NBFC. Through our bank of­fer­ings, we will seek to fur­ther strengthen the re­la­tion­ship with our NBFC cus­tomers and at­tract new cus­tomers,” he elab­o­rates.

IN­CLU­SIVE FI­NANC­ING

Au Small Fi­nance Bank has been main­tain­ing that it would ful­fil one of the im­por­tant aims of the gov­ern­ment, that is, fi­nan­cial in­clu­sion. Agar­wal de­scribes this mis­sion thus: “Fi­nan­cial in­clu­sion or in­clu­sive fi­nanc­ing is the de­liv­ery of fi­nan­cial ser­vices at af­ford­able costs to sec­tions of dis­ad­van­taged and low-in­come seg­ments of so­ci­ety, in con­trast to fi­nan­cial ex­clu­sion where those ser­vices are not avail­able or af­ford­able. Our de­ci­sion to tran­si­tion to an SFB was pur­suant to our

mis­sion of fi­nan­cial in­clu­sion and of­fer­ing a di­verse range of fi­nan­cial prod­ucts and ser­vices to the un­der­served and un­served seg­ments of the In­dian pop­u­la­tion. We aim to be a re­tail fo­cused, pre­ferred, trusted SFB, pro­vid­ing in­te­grated and tailor-made so­lu­tions for the un­der­served ecosys­tem with a tech­nol­ogy led model for su­pe­rior ser­vice and low-cost reach, sup­ported by ro­bust IT, risk man­age­ment and hu­man re­source pro­cesses, poli­cies and sys­tems.”

EX­PAND­ING OP­ER­A­TIONS

The bank in­tends to strate­gi­cally ex­pand its op­er­a­tions by of­fer­ing a di­verse suite of bank­ing prod­ucts and ser­vices at its branches. It pro­poses to im­ple­ment cus­tomer reach pro­grams and en­cour­age all its NBFC cus­tomers to open bank ac­counts with it. To­day, it has 269 branches across Ra­jasthan, Delhi, Gu­jarat, Ma­ha­rash­tra, Goa, Ut­tar Pradesh, Mad­hya Pradesh, Ch­hat­tis­garh, Hi­machal Pradesh, Haryana, Pun­jab and Chandigarh. It plans to open 162 branches dur­ing the fi­nan­cial year 2017-18.

NEW BIZ MODEL

As an NBFC, the com­pany op­er­ated in three busi­ness lines - ve­hi­cle fi­nance, MSME loans and SME loans. Upon tran­si­tion as a bank, it has ex­panded and strength­ened its busi­ness model. In ad­di­tion to the ve­hi­cle fi­nance, MSME and SME of­fer­ings, it is now of­fer­ing work­ing cap­i­tal fa­cil­i­ties, gold loans, agri­cul­ture re­lated term loans, Kisan Credit Cards for farm­ers and loans against se­cu­ri­ties. It is also plan­ning to sell mu­tual funds, in­sur­ance and risk man­age­ment prod­ucts and pro­vide fi­nan­cial ad­vi­sory ser­vices, sub­ject to re­ceipt of req­ui­site ap­provals from reg­u­la­tory au­thor­i­ties.

Says Agar­wal: “We be­lieve that our prior ex­pe­ri­ence in the hous­ing fi­nance busi­ness will help us as we de­velop our home loans busi­ness as an SFB, while our ex­pe­ri­ence in our cur­rent busi­ness lines will as­sist us in de­vel­op­ing our li­a­bil­ity busi­ness and in­tro­duce new prod­ucts and ser­vices to meet the evolv­ing needs of our cus­tomers. We in­tend to op­er­ate as a on­estop shop, de­liv­er­ing high qual­ity prod­ucts and ser­vices, along with a stan­dard­ized cus­tomer ex­pe­ri­ence across branches to a di­ver­si­fied cus­tomer base.”

Agar­wal is also hope­ful that the growth of trans­ac­tion bank­ing op­er­a­tions will pro­vide sup­port across the bank’s var­i­ous prod­uct of­fer­ings and busi­ness ver­ti­cals and en­able it to serve its ex­ist­ing cus­tomers’ liq­uid­ity and cash flow re­quire­ments more ef­fec­tively. In ad­di­tion, new prod­uct of­fer­ings would en­able it to sup­ple­ment its ex­ist­ing sources of liq­uid­ity. “Our new prod­uct and ser­vice of­fer­ings com­bined with our his­tor­i­cal NBFC of­fer­ings and in­fra­struc­ture, present us with an op­por­tu­nity to cross-sell a di­verse range of fi­nan­cial prod­ucts and ser­vices to our ex­ist­ing and po­ten­tial cus­tomer base,” he avers.

He says a large seg­ment of In­dia’s ru­ral and semi-ur­ban pop­u­la­tion is cur­rently un­served and un­der­served by for­mal fi­nan­cial in­sti­tu­tions. “Ac­cord­ing to the Global Fin­dex Data­base 2014, In­dia is home to 21% of the world’s un­banked adults and ap­prox­i­mately two-thirds of South Asia’s. Over the years, we have fo­cused on cus­tomers in such mar­kets. A sig­nif­i­cant num­ber of our cus­tomers are from the un­served or un­der­served fi­nan­cial seg­ment and pri­mar­ily first-time pur­chasers of fi­nan­cial prod­ucts, par­tic­u­larly those with­out a credit his­tory. This of­fers us sig­nif­i­cant growth op­por­tu­ni­ties and cus­tomer loy­alty. We be­lieve that our un­der­stand­ing of the lo­cal char­ac­ter­is­tics of th­ese mar­kets and cus­tomers has al­lowed us to ad­dress the unique needs of our low and mid­dle-in­come cus­tomers and as­sisted us to pen­e­trate deeper into such mar­kets. The reach of our branches al­lows us to ser­vice our ex­ist­ing cus­tomers and at­tract new cus­tomers as a re­sult of per­sonal re­la­tion­ships cul­ti­vated through prox­im­ity and fre­quent in­ter­ac­tion by our em­ploy­ees,” says he.

PRI­OR­ITY SEC­TOR LEND­ING

Agar­wal is aware that as a small fi­nance bank, he has a higher tar­get for pri­or­ity sec­tor lend­ing. Says he: “As per the RBI guide­lines for small fi­nance banks, at least 75% of our lend­ing has to be to­wards pri­or­ity sec­tors such as agri­cul­ture, small en­ter­prises and weaker sec­tions of the so­ci­ety. As an SFB, we are also re­quired to have 25% of all branches in un­banked ru­ral cen­ters within one year from the date of com­mence­ment of op­er­a­tions. If you see our his­tory, as Au Fi­nanciers we have over 20 years of op­er­at­ing ex­pe­ri­ence with sig­nif­i­cant pres­ence in ru­ral and semi­ur­ban mar­kets with fo­cus on low and mid­dle-in­come cus­tomers. As of 31March 2017, 146 of our 301 NBFC branches were lo­cated in such mar­kets. We have an un­der­stand­ing of this mar­ket and its re­quire­ments and we be­lieve that this will

help us im­mensely as we em­bark on our new jour­ney as an SFB. We are con­fi­dent of of­fer­ing an en­tire bou­quet of fi­nan­cial ser­vices to our un­der-served cus­tomer base thereby fur­ther­ing fi­nan­cial in­clu­sion and align the gov­ern­ment’s var­i­ous ini­tia­tives on this front in­clud­ing Jan-Dhan, less-cash and more elec­tronic trans­ac­tions, etc.”

Ac­cord­ing to him, ve­hi­cle loans (50%) and MSME loans (30%) formed 80% of the to­tal AUM of `10,734 crore of the com­pany as on 31 March 2017. A sub­stan­tial pro­por­tion of the ve­hi­cle loan port­fo­lio and the en­tire MSME loan port­fo­lio qual­ify for pri­or­ity sec­tor lend­ing. Some por­tion of SME loan also qual­i­fies for this. Be­sides, the com­pany has also been as­sign­ing / se­cu­ri­tiz­ing pri­or­ity sec­tor loan pools to var­i­ous banks over the years. “We are com­fort­ably placed to achieve the tar­gets set by reg­u­la­tor,” he says with con­fi­dence.

IN­VESTORS

AU Small Fi­nance Bank has been able to at­tract in­vest­ment from global in­vestors like IFC, War­burg Pin­cus, Chrys Cap­i­tal, etc. Agar­wal says this has been pos­si­ble be­cause as an NBFC the com­pany has been able to de­liver a ro­bust fi­nan­cial and op­er­at­ing per­for­mance. “In our jour­ney of 20 years, we have built a well-di­ver­si­fied prod­uct port­fo­lio with a strong distri­bu­tion net­work through deeper pen­e­tra­tion in our ge­ogra­phies, serv­ing low and mid­dlein­come in­di­vid­u­als and busi­nesses that have lim­ited or no ac­cess to for­mal bank­ing and fi­nance chan­nels,” he points out.

In th­ese cir­cum­stances, was an IPO nec­es­sary?

Agar­wal does not hes­i­tate to an­swer: “We are well cap­i­tal­ized. Our CAR is 23.21% as on 31 March 2017. So, we are not rais­ing any fresh funds. The IPO is en­tirely an Of­fer for Sale. The of­fer com­prises an of­fer for sale of up to 53,422,169 eq­uity shares by the sell­ing share­hold­ers, which in­clude our pro­mot­ers and the pro­moter group. The pro­ceeds from the of­fer will be paid to sell­ing share­hold­ers, in pro­por­tion of the re­spec­tive por­tion of the of­fered shares trans­ferred pur­suant to the of­fer, and we will not re­ceive any such pro­ceeds.”

“We ex­pect that list­ing of the eq­uity shares will en­hance our vis­i­bil­ity and brand and pro­vide liq­uid­ity to our ex­ist­ing share­hold­ers,” he has­tens to add.

TECH­NOL­OGY PLAT­FORM

Fi­nally, the tech­nol­ogy plat­form the bank has built.

Agar­wal says the com­pany has made sig­nif­i­cant in­vest­ments in IT in­fra­struc­ture to be able to pro­vide qual­ity ser­vice at low costs as an SFB. He lists the ini­tia­tives that are on the anvil:

Mo­bil­ity so­lu­tions for cus­tomers and sales force. The bank will soon launch in­ter­net bank­ing and mo­bile bank­ing ser­vices. It has en­tered into agree­ments with lead­ing IT com­pa­nies for the de­vel­op­ment of mo­bile and tablet based so­lu­tions for the sales and col­lec­tion teams, loan orig­i­na­tion, field in­ves­ti­ga­tion, and cap­tur­ing leads and open­ing cur­rent and sav­ings ac­counts. Th­ese so­lu­tions will also en­able the sales teams to up­load doc­u­ments, con­duct cer­tain trans­ac­tions and check on­line credit his­tory re­ports. The bank will also adopt sys­tems that fa­cil­i­tate EKYC and bio­met­ric ver­i­fi­ca­tion, al­low­ing cus­tomers to dig­i­tally sign doc­u­ments.

Doorstep bank­ing through mi­cro ATMs. While all the metro, ur­ban and semi-ur­ban branches are equipped with ATMs, it will use mi­croATMs to en­sure last mile reach to un­banked cus­tomers. Th­ese mi­croATMs will be de­ployed through sales force and busi­ness correspondents in ru­ral and un­banked re­gions to en­sure easy ac­ces­si­bil­ity to trans­ac­tion pro­cess­ing ser­vices.

Cus­tomer data an­a­lyt­ics. The bank bas in­te­grated cus­tomer data across mul­ti­ple touch­points such as call cen­ters, sales force, branches and web-based and mo­bile ap­pli­ca­tions to de­sign cus­tom­ized of­fer­ings for tar­get cus­tomers through the use of data an­a­lyt­ics. An­a­lytic in­sights will be used to launch new cam­paigns and loy­alty pro­grams.

In­ter­nal pro­cess­ing and mon­i­tor­ing. A de­tailed credit score model will be built for cer­tain prod­ucts based on sta­tis­ti­cal tools to model the credit as­sess­ment process with a sim­pli­fied in­ter­face to en­sure faster and more ef­fec­tive credit as­sess­ment. The bank will have a cen­tral­ized risk-based loan-to­value pric­ing ma­trix and as­set se­lec­tion ma­trix to en­able faster credit as­sess­ment while en­sur­ing low risk.

He con­tin­ues: “At Au Small Fi­nance Bank, we en­able a con­ve­nient bank­ing ex­pe­ri­ence and we un­com­pli­cate bank­ing for our cus­tomers. The bank is fully aligned with the vi­sion of prime min­is­ter Naren­dra Modi on fi­nan­cial in­clu­sion and dig­i­tal bank­ing and is strongly en­dors­ing this through Aad­har-en­abled pa­per­less ac­count open­ing, pa­per­less trans­ac­tions (no/ min­i­mal forms), no base branch con­cept, etc. We seek to pro­vide a dif­fer­en­ti­ated tech­nol­ogy frame­work, en­hanc­ing con­ve­nience for our cus­tomers and re­duc­ing op­er­a­tional expenditure at our branches. We in­tend to dis­trib­ute tablets in­te­grated with bio­met­ric de­vices and Blue­tooth print­ers to our per­son­nel to en­able faster cus­tomer ver­i­fi­ca­tion and ac­count open­ing and ac­ti­va­tion.

We have com­menced us­ing in­ter­ac­tive voice re­sponse sys­tems in English and se­lect re­gional lan­guages to cater to our ex­ten­sive cus­tomer base. Fur­ther, we in­tend to ex­plore de­liv­er­ing ser­vices through al­ter­nate dig­i­tal chan­nels such as se­cure on­line bank­ing, mo­bile bank­ing, dig­i­tal wal­lets and on­line loan pro­cess­ing and credit ap­provals. I be­lieve greater adop­tion of dig­i­tal ser­vice de­liv­ery mech­a­nisms will en­able us to be more ef­fi­cient, cus­tomer friendly and over time per­form more re­li­able data an­a­lyt­ics, re­sult­ing in tar­get cus­tomer pro­fil­ing, cus­tom­ized and tailor-made prod­ucts to suit the di­verse re­quire­ments of our cus­tomers and im­proved cus­tomer sat­is­fac­tion.”

San­jay Agar­wal is con­fi­dent of of­fer­ing di­verse range of fi­nan­cial prod­ucts and ser­vices to the un­der­served and un­served seg­ments of the In­dian pop­u­la­tion

In­au­gu­ra­tion of the branch in Mumbai at the hands of Dr Harsh Ku­mar Bhan­wala, chair­man, NABARD

San­jay Agar­wal and Kaizad Bharucha, ED, HDFC Bank, at a press con­fer­ence an­nounc­ing the bank’s IPO in Mumbai

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