AU Small Finance Bank Downplays Regional Concentration Risks

AU Small Finance Bank Ltd.’s share of business from Rajasthan will come down over the next few years, Sanjay Agarwal, managing director and chief executive officer, told BloombergQuint, allaying investor fears over regional concentration risk.

While the state of Rajasthan forms as much as 50 percent of AU Small Finance Bank’s assets under management (AUM), Agarwal said the company’s risk cannot be compared to that of erstwhile SKS Microfinance Ltd. (now Bharat Financial Inclusion Ltd.) in Andhra Pradesh given that AU Small Finance Bank is present only in secured lending as compared to the unsecured nature of lending in the microfinance business.

Rajasthan’s share in the AUM mix has gone down from 100 percent in 2008 to 50 percent in the last financial year.

“But Rajasthan will continue to have a lion’s share in our assets under management. See its share coming down to 35 percent in the next 3-5 years,” Agarwal said.

The AUM mix of its vehicle finance business is also expected to come down from the current 50 percent to 25-30 percent in the future as micro, small and medium enterprises (MSMEs), small and medium enterprises (SMEs) and home loan businesses pick up from a low base.

The Reserve Bank of India had earlier restricted foreign investment in the company and on Thursday again allowed foreign investors to buy as the holding came down below the limit of 49 percent. The current holding of foreign investors in the bank stands at 47.11 percent, Agarwal said.

Also Read: AU Small Finance Bank IPO: Everything You Need To Know

Impact Of Transition To Small Finance Banks On NPAs

Gross NPAs for AU Small Finance Bank shot up from 0.6 percent in FY16 to 1.6 percent in FY17. The management attributed the rise to two events: demonetisation and the move to 120 days-past-due basis NPA recognition from the previously followed 150 dpd basis.

Agarwal added that the gross NPAs could increase by another 20-30 basis points in FY18 on moving to 90 dpd basis NPA recognition post transformation into a small finance bank.

AU Small Finance Bank’s net interest income grew at a compounded annual growth rate of 33.9 percent to Rs 916.7 crore in the financial year 2016-17 from Rs 213 crore in financial year 2012-13. Operating profit grew at a faster 37.2 percent in the same period while gross Assets Under Management (AUM) rose 23.7 percent in the same period. The company believes it can continue with its past growth rate trajectory even in the future.

Future Capital Raising Plans

The company’s current capital adequacy ratio stands at 21 percent against a regulatory requirement of 15 percent and the management believes they will not need to raise further capital at least for the next three to five years.

“Even if the company continues to grow at the same pace at which we have grown in the last 7-8 years, the company will not require more capital in the next 3-5 years to be able to meet the regulatory norms,” Agarwal said.

The company envisages a capex requirement of Rs 250 crore over the next five years to help with the information technology architecture and invest in branch expansion plans. The company has spent Rs 120 crore on 300 branches so far.

AU Small Finance Bank has hit the capital market with an IPO to raise up to Rs 1,912 crore. Its share sale of more than 3.7 crore shares was subscribed 1.6 times at the end of Day 2 of the offer on Thursday.