AU Small Finance Bank: RBI Flags Concerns On Rapid Growth— BQ Exclusive

While the RBI does not directly manage the growth of banks, it has the right to engage with banks when the growth of one bank is out of sync with the rest of the industry and peer small finance banks, the first of the two people quoted above said.

The focus of the meetings with the AU SFB was that their high growth should be in line with the growth absorption capacity of their core segment, this person said.

During the first meeting in February 2022, the bank was told that its growth was not in line with what other banks in the system were reflecting. The bank was told to work on tapering their growth since the regulator was not comfortable with it.

Queries sent to AU Small Finance Bank and the RBI remained unanswered.

While the RBI does not directly manage the growth of banks, it has the right to engage with banks when the growth of one bank is out of sync with the rest of the industry and peer small finance banks, the first of the two people quoted above said.

The focus of the meetings with the AU SFB was that their high growth should be in line with the growth absorption capacity of their core segment, this person said.

During the first meeting in February 2022, the bank was told that its growth was not in line with what other banks in the system were reflecting. The bank was told to work on tapering their growth since the regulator was not comfortable with it.

Queries sent to AU Small Finance Bank and the RBI remained unanswered.

The RBI’s concern over growth stems not just from the absolute number but also from whether this signifies high incentives for achieving growth, along with a dilution of underwriting standards, risk management, and risk model, the people quoted above said on the condition of anonymity as details are not public yet.

In the year ended March 2022, AU Small Finance Bank saw its outstanding advances rise 33% year-on-year to Rs 46,095 crore. Again in the April-June 2022 quarter, advances rose 43% year-on-year, and in the second quarter, outstanding loans were up 44%, according to data released by the bank.

In terms of loans disbursed, the bank disbursed Rs 8,445 crore, Rs 8,065 crore, and Rs 10,012 crore in the first three quarters of FY23, compared with Rs 25,407 crore in FY22.

After the growth numbers did not match the central bank's advisory, a senior RBI official called the bank’s managing director and chief executive officer in August and reiterated his displeasure that guidance had not been heeded, the second person quoted above said.

Post-August, the central bank also communicated directly with key members of the board of directors of the AU Small Finance Bank, not just on growth but also on the high attrition levels at the branch level, which coincided with high targets being set for front-facing staff.

There were also concerns about attrition in some key roles at the bank, the people quoted above said.

After the August meeting, the bank focused on improving compliance in line with the RBI’s supervisory inputs. Subsequently, the bank also provided the regulator with a revised business plan with lower growth targets and a focus on risk mitigation, the second person quoted above said.

The RBI has been monitoring the bank’s data on a month-to-month basis after this to ensure management commitments are being met, the first person said.

According to a third person, who also spoke on the condition of anonymity, last year at AU Small Finance Bank the management had started to sound off caution to teams regarding the pace of growth. It was evident in the bank's commentary.

"What I want to say is just that while you grow, let's grow sustainably. So, when you have a lot of demand, you can pick and choose. So, we are doing that, and in doing that, we really want to calibrate ourselves. Let's price rates. Let's understand customers more. Let's see that even on a high inflation, high interest rate cycle, it’s okay to pay EMI," AU Small Finance Bank Managing Director and Chief Executive Officer Sanjay Agarwal told analysts after announcing the July-September quarter results last year.

Similarly, while announcing the December quarter results, Agarwal said that he was focused on building "a very sustainable bank without any noise in any quarter". The bank was also being careful on not being too aggressive or just look for growth at any cost, he said.