(File) A branch of AU Small Finance Bank in Mumbai.
Image: Indranil Aditya/NurPhoto via Getty Images
Last evening when news of the AU Small Finance Bank’s universal banking licence came in its founder Sanjay Agarwal pointed to the fact that he had been ‘irrationally rewarded’. After all, by his own admission, here was an entrepreneur from Jaipur who had started a business in 1995 with no connections and no background in lending.
Now, three decades later, with its banking licence in place, AU Small Finance Bank is more valuable than both Bandhan Bank and IDFC First Bank—the last two banks to be licensed, in 2014. AU is worth Rs 56,000 crore while Bandhan and IDFC First are valued at Rs 50,000 crore and Rs 26,000 crore respectively.
AU, and its backers, know that the bank has done something right. After all passing RBI scrutiny for a banking licence is a tough and exacting process. In the last decade Sachin Bansal of Flipkart fame has failed to pass muster as has Indiabulls Finance, which aimed to enter the banking space through the acquisition of Lakshmi Vilas Bank.
As we wrote in our story In July, Sanjay Agarwal and his team have a very clear understanding of risk and how to keep it in check. This has to do with the time he spent making loans and then as a direct sales agent for HDFC Bank. By his own admission he claims he learned the rules of lending there. “If there is no security then I don’t want to lend,” was his guiding principle.
As the bank grew Agarwal and his lieutenant Uttam Tibrewal went about building the franchise methodically. Deposits were grown by offering a 7 percent savings account rate. In 2015, over 80 percent of its business was in Rajasthan. Cut to 2025 and that number has dropped to 30 percent.
Agarwal is conscious that no geography or business line should be more than 15 percent. He’s also clear that AU Bank should offer everything a large bank does—from credit card to personal loans and forex services to micro finance.
Agarwal’s clear handing of risk, the steady growth in both deposits and loans, and the lack of surprises on the NPA front have meant that the market values the bank at a premium to its peers—AU is priced at 3.5 times book, while IDFC First trades at 1.2 times and Bandhan at book value. By far the largest in the small finance bank universe, it also managed to get to 40 percent of the total size of the business book of small finance banks.
Going forward the team at AU is clear that it is going to be more of the same. A relieved Agarwal pointed out to the fact that it would now be easier to get business. “The biggest problem earlier was people would wonder if we are a co-operative bank or whether we can accept large deposits,” he said.
The cost of funds that stands at 7 percent will gradually trend downwards allowing them to pass lower loan rates to customers. He intends to keep the bank a retail franchise and is in no hurry to compete with the big banks on corporate loans. Asked about how the licence will help, he said, “The immediate benefit will be a shift in momentum.” Investors are buying the story for now. In a year when the Sensex has been flat its stock is up 37 percent since the start of 2025.