The transition to a bank has resulted in a 110-basis point (bps) drop in AU Small Finance Bank’s cost of funds, managing director and chief executive officer Sanjay Agarwal told Shritama Bose. The bank will look to improve its provision coverage ratio (PCR) to 50% over the next two years from 37% now, he added. Edited excerpts:
You have seen a loan growth of 48%. Which products have driven this growth?
This was our first year after the transition to a bank and as we have commented earlier also, our asset machine is intact. The prime growth has come from our two main products, one of which is vehicle finance and has seen 33% growth. The industry has grown positively this year. A lot of manufacturing and a lot of service enterprise has shown that there is a little uptick in vehicle growth. So we are part of that story. Another piece which is important is our micro and small (enterprise) financing. That has grown by 55% and this growth has come because of the movement of some enterprises into the formal segment from informal segment post-GST (Goods and Services Tax rollout) and demonetisation. Other than these two, we have also built our business banking book. On our platform, we are allowed to offer both term loans, but also cash credit, OD (overdraft limits) and LCs (letters of credit). That has taken off well. We have also done gold loans, consumer-durable loans and home loans, which we have just started.
To what extent has pricing driven deposit growth? Will you continue to hold deposit rates at current levels?
The answer to that would lie in the future. We are a new kid on the block and people have a tendency to move towards a new enterprise on seeing some value proposition. We offered them the price, the services and a wide range of product offerings. But primarily, what’s driven things is the value proposition in terms of interest rates and I think we should continue with that for the next two to three years because there is a lot of competition here. Further differentiation beyond rates will come only in another two to five years. So AU will not cut rates unless there is a change in the rate cycle.
What has been the impact of the deposit growth on your cost of funds?
Our cost of funds as an NBFC was around 9.5% and that has gone down by 110 basis points (bps) in the last one year. This was because of two reasons. One is that our incremental cost of deposits was 6.5% and also the NBFC borrowings made at a higher rate have been repaid over the past year. Going forward, we hope that our cost of borrowings will fall another 100 bps this year. We should be in the range of 7.2-7.25%.
Your PCR remains low at 37%. Why is that and where do you see it in the quarters ahead?
There is a legacy behind that because as an NBFC, we were writing off our book up to 360 days and that was the base as at the end of March 2017. But, as a bank, the provisioning norms for us are different. In the next two years, we will catch up to around a 50% coverage ratio. But, you have to appreciate that the book is secured. It is retail in nature and I believe that a coverage ratio of around 40% is good enough to take care of things. Having said that, as a prudent lender, we would like to have a 50% coverage, but that will take another two years.
Any plans of raising equity capital in FY19?
Our capital adequacy is around 18.5-19%. If we want to grow by around 35%, we will have to raise capital. Whether it will be tier-1 or tier-2 is yet to be discussed. For tier-2, we would look at around Rs 500 crore.