AU Small Finance Bank: From Jaipur To Mumbai's BKC, This Small-Town Lender Will Soon Be A Full Bank

On a muggy September evening in 2007, AU Financiers (India) Ltd founder Sanjay Agarwal came to Mumbai's Nariman Point. He had a meeting with Motilal Oswal Private Equity's Vishal Tulsiyan to discuss a potential investment opportunity.

Tulsiyan had already told his bankers that he had no interest in the business because his mandate from the owners was to find companies with a revenue of Rs 10 crore at least. The 11-year old AU Financiers at that time had a revenue of just under Rs 2 crore. Still, Tulsiyan decided to speak with Agarwal as a courtesy.

Agarwal had set up a small vehicle financing company in Jaipur, Rajasthan and was looking to expand. Son of an engineer, 37 year-old Agarwal, was then a first generation entrepreneur and a certified chartered accountant. He had managed to catch the fancy of small business owners in the state. The company was so very popular in Rajasthan that people simply referred to it as "Financiers".

In a public speech he delivered at the Motilal Oswal Business Impact Conference in 2019, Agarwal revealed that taking a flight was very rare and it was not clear where one is supposed to go from the gate. "My legs used to shake every time I went to the airport," Agarwal said.

Over the course of his meeting which lasted past midnight, Agarwal successfully sold the AU Financiers story to Tulsiyan. Eventually in March 2008, Motilal Oswal's private equity wing invested in the company.

Soon after the investment, AU Financiers faced its first ever existential crisis. In September 2008, the world was grappling with the global financial crisis which germinated in the US, but hurt everyone everywhere.

Agarwal had previously said that he had received cautionary messages from Reserve Bank of India that his business model was too risky and that he had to cut down.

Agarwal went back to Motilal and sought a further Rs 10 crore cheque and some amount of trust in his tenacity. What germinated as a small regional non-bank lender, transitioned to a small finance bank in 2017 and has now received the regulator's stamp of approval to spread its wings further.

On Thursday, the RBI extended its in-principle approval to AU Small Finance Bank to transition to a universal bank.

“We have been irrationally rewarded in our journey,” Agarwal told reporters on Friday at a press event after getting the in-principle nod. 

AU Is No Longer Small

In the year ended March 2025, AU Small Finance Bank crossed the Rs 1 lakh crore advances mark, meaning it is no longer a "small" lender. India's banking system classifies a lender of AU Small Finance Bank’s size as a “mid-sized lender”.

In terms of deposits too, AU Small Finance Bank has managed to grow its base significantly, thanks to a strong base of branch and banking outlets spread across the country.

When AU Financiers started operations, it had business across Rajasthan and then some in Gujarat. Today as a scheduled commercial bank, it boasts of presence across 21 states and four union territories.

To transition to a universal bank, a small finance bank must maintain a net profit for two consecutive financial years. Similarly, its gross non-performing asset ratio must not exceed 3% and net NPA ratio must be 1% or less for two consecutive years. The small finance bank must have a net-worth of Rs 1,000 crore or more.

In FY25, the small finance bank reported a net profit of over Rs 2,100 crore, which was Rs 1,535 crore in FY24. Since it became a small finance bank in FY18, the bank has never reported a loss on an annual basis. Except a brief rise on bad loans in FY21, AU Small Finance Bank has managed to keep its gross and net NPA ratios in check. Its net-worth too has not fallen below Rs 1,000 crore.

In the years it has existed as a small finance bank, AU has built a wider business proposition, extending from vehicle finance, small business loans, home loans, agriculture finance and gold loans. As part of its growth, the company also entered microfinance with the acquisition of Fincare Small Finance Bank.

Vehicle finance constituted 32.4% of total loans as of June 30, while micro business lending was at 26.5%. Retail secured assets are at 67%,unsecured loans at 8% and commercial banking at 20.8%.

Not All Businesses Have Paid Off

In 2021 AU Small Finance Bank waded into the credit card business, targeting the first time users. The launch was preceded by much fanfare. In 2022 the bank had a base of over 2 lakh cards, nearly half of whom were issued their first ever card.

The bank’s performance though has not been great, something that Agarwal admitted. While announcing the bank’s Oct-Dec-quarter results last year, Agarwal told analysts that the bank got “a few things wrong”. 

As of June 30, the lender had 9.8 lakh cards in force, with an outstanding loan book of Rs 2,327 crore. The rise in credit card defaults had been much higher than expected, Agarwal had told analysts on the Q3 conference call.

The bank has reoriented its cards book by bringing down outstanding loans, tightened underwriting, reduced limits for weaker customers and strengthened monitoring of daily transactions.

While announcing the first quarter results, the bank said that it has seen credit costs peak. 

The bank expects that it will arrest stress completely by December and resume growth on the cards business. 

The other business area which has seen some stress is microfinance. AU Small Finance Bank entered microfinance through inorganic means by acquiring its peer Fincare Small Finance Bank. The acquisition was effective April 1, 2024. 

At the time of the acquisition, AU Small Finance Bank got access to about Rs 8,000 crore worth microfinance loans. This was split between retail micro loans and micro business loans. 

Soon after the acquisition though, microfinance loans started to go sour across the industry. AU Small Finance Bank was not spared. 

Asset quality performance has been lower than the bank expected, Agarwal told analysts while discussing the first-quarter results. The bank expects credit costs to be around 5% for the current financial year, higher than the 3-4% expectation earlier. 

As of June 30, the microfinance loan book has fallen to Rs 6,200 crore, falling 22% year-on-year. The bank expects to increase the book going ahead to Rs 7,000 crore by the end of the year. 

Does this raise questions about the management’s capability of handling new businesses? Agarwal believes that we may need to be a little more charitable to the bank. 

“There might be some mistakes, but if you are not willing to take risk you can’t run a bank,” he said responding to NDTV Profit’s question at the Friday press event.

Way Ahead

Agarwal believes that the business model will not materially change in three to five years, after becoming a universal bank.

“We have been retail guys since the start. We will stick to retail,” Agarwal said on Friday. Going ahead, the bank will evaluate how to grow the corporate business, once it has established itself.

The only condition laid down by the RBI is transferring Agarwal and his family’s 22% ownership to a non-operative financial holding company. In the 18 months of the in-principle nod, the bank will need to conclude this transaction.

While Agarwal is unclear about the time required to complete this process, he is confident that he will achieve it soon. Going ahead the bank will also move its major operations to its soon-to-be-unveiled Mumbai office in Bandra Kurla Complex.

“We will become more of a Mumbai bank than a Jaipur Bank,” he said while speaking to reporters on Friday. This will help attract newer talent at the bank, even though the bank will continue to invest in its existing staff, he said.

Tech and talent are the two biggest investment areas for AU Small Finance Bank, HR Khan, chairman of the bank said. Khan is also a former deputy governor of the RBI. Interestingly, Khan was in his regulatory role when the RBI came out with the concept of a small finance bank.

“This platform will not be a transaction-based platform. We will be a relationship-based platform,” Agarwal said.