Au Small Finance Bank to leverage its NBFC basics
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.”
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.”
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.
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.”
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.
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.
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