au small finance bank ltd Directors report

Dear Members,

Your Board of Directors are pleased to present the Twenty-Eighth Annual Report of the AU Small Finance Bank Limited ("Bank") covering business and operations together with the Audited Financial Statements and Independent Auditors Report for the financial year ended March 31, 2023.

A. Financial Summary & Highlights

The summary of the financial performance of your Bank for FY 2022-23 is presented below:

(C in crore)
Particulars	March 31, 2023	March 31, 2022
Total Income	9,239.87	6,915.42
Interest Income	8,205.41	5,921.73
Other Income	1,034.46	993.69
Interest Expenditure	3,780.13	2,687.61
Operating Expenses (excluding depreciation)	3,254.84	2,272.60
Profit before Depreciation, Provisions and Tax	2,204.90	1,955.21
Depreciation	185.42	140.17
Provision for Income Tax	436.71	324.24
Other Provisions and Write-offs	154.84	360.97
Net Profit	1,427.93	1,129.83
Appropriations
Transfer to Statutory Reserve	356.98	282.46
Transfer to Special Reserve u/s 36(1)(viii) of Income Tax Act, 1961	115.00	117.30
Transfer to Capital Reserve	2.52	18.52
Transfer to Investment Reserve Account	-	-
Transfer to Investment Fluctuation Reserve	17.20	20.24
Dividend pertaining to previous year paid during the year	31.51	-
Dividend (in C) (Per Equity Share)	1	0.50*
Surplus carried over to Balance Sheet	4,287.14	3,382.42
Earnings Per Share (EPS) (in D) (After excluding Exceptional Items not annualised)
Basic (in D)	21.86	18.03
Diluted (in D)	21.74	17.85

*The Board recommended dividend of Cl per equity share on pre-bonus share capital for the year ended March 31, 2022. Further, consequent to approval of the Bonus Issue of 1:1 by the shareholders vide Postal Ballot dated May 29, 2022, the dividend was proportionately adjusted to C0.50 per equity share on post-bonus share capital which was duly approved by the shareholders at the 27^th Annual General Meeting ("AGM") held on August 23, 2022.

Key Performance Highlights

Your Bank witnessed growth and consistent performance in FY 2022-23. The key financial performance indicators for the year are as follows:

• Profit Before Tax increased to C1,864.64 crore for FY 2022-23 vis-a-vis C1,454.07 crore for FY 2021-22 registering YoY growth of 28.24%.

• Net Profit After Tax increased to C1,427.93 crore for FY 2022-23 vis-a-vis C1,129.83 crore for FY 2021-22 registering YoY growth of 26.38%.

• Balance sheet size grew to C90,216.12 crore as on March 31, 2023 vis-a-vis C69,077.80 crore as on March 31, 2022 registering YoY growth of 30.60%.

• Deposits grew by 32% YoY to C69,365 crore and CASA ratio improved to 38.4% as on March 31, 2023 against 37.3% as on March 31, 2022 resulting to consistent and strong performance across parameters while continuing to progress on the journey of building a standardised, scalable, and sustainable banking franchise in deposits, assets, and digital banking.

• Gross NPA and Net NPA ratio continue to gradually decline to 1.66% and 0.42% as on March 31, 2023 vis-a-vis 1.98% and 0.50% as on March 31, 2022 on account of significant improvement in the asset quality.

Analysis of Banks performance is covered in Management Discussion & Analysis section of the Annual Report.

B. Dividend

The Board at its meeting held on April 25, 2023 recommended dividend of 10% i.e., C1 per fully paid-up Equity Share of C10 each for the year ended March 31, 2023. The payment of dividend is subject to approval of the shareholders at the forthcoming AGM of the Bank.

In terms of regulation 43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("Listing Regulations") and Reserve Bank of India ("RBI") guidelines, your Bank has formulated and adopted a Dividend Distribution Policy which inter alabalances the objective of rewarding its shareholders by sharing a part of profits and ensuring that sufficient funds are maintained for the growth of the Bank.

The dividend declared is in compliance of Dividend Distribution Policy and applicable RBI guidelines/ Regulations. The Dividend Distribution Policy was reviewed by the Board from time to time and the same has been hosted on the website of the Bank at https://www.aubank.in/investors/secretarial-policies.

C. Business Overview

The FY 2022-23 witnessed a period of unpredictable macro and global headwinds with constrained liquidity and elevated inflation resulting in notable upsurges in interest rates and intensified competition for deposits. Amidst this challenging and unsettled environment, Bank exhibited commendable resilience and achieved remarkable results across various key performance indicators and remained steadfast in commitment to establish a robust Banking ecosystem encompassing Deposits, Assets, and Digital Banking. Bank continued its efforts towards developing a standardised, scalable, and sustainable banking brand and strategically enhanced its distribution channels and made continuous investments in digital initiatives, branding, and distribution. These efforts are aimed at capitalising the substantial opportunities within the Banking sector and ensuring readiness of Bank for future.

The Bank demonstrated strong performance across key parameters including an enhanced CASA ratio and a balanced mix of retail deposits, acquisition through digital products, credit growth across all lending verticals, stable spreads and asset quality, reduction in GNPA ratio supported by strong collections remaining north of 100% achieving an overall robust level of profitability.

The Bank continued its momentum on harnessing the digital capabilities through diversified digital banking offerings, i.e. AU 0101, Video Banking, Credit Cards, UPI QR, and more, all of which continued to see strong momentum during the year and notably, over 5 lakh cards issued and out of which nearly one-third of customers availing their first-ever credit card and over 1 million UPI QRs to merchants were issued. This coupled with QR- based lending, enabled us to empower this customer segment with easy access to formal credit.

As on March 31, 2023, Bank has established operations across 1,027 Banking touchpoints while serving 38 lakh+ customers in 21 States & 3 Union Territories with an employee base of 28,320 employees. Banks focus on digital initiatives has seen significant traction in all areas.

Bank is delighted to announce that the RBI through its letter dated April 19, 2023, has issued a licence authorising the Bank to operate as an Authorised Dealer Category-I (AD-I) under Section 10 of the Foreign Exchange Management Act, 1999 to engage in foreign exchange transactions, including buying and selling currencies, facilitating international trade, and providing foreign exchange services to its Business including EXIM customers, Resident & NR customers. This shall facilitate international trade by providing services such as issuing letters of credit, handling import/export documentation, and offering trade finance solutions leading to competitive advantage, diversification of revenue streams and enhanced Credibility and Trust.

The key business developments and segment-wise position of business and its operations are covered in detail under the Management Discussion & Analysis section of the Annual Report.

D. Credit Rating

The details of credit rating assigned to the Bank for debt instruments issued and outstanding as on March 31, 2023 along with outlook is provided below:

Nature of Debt Instrument	Nature of Term	CRISIL*	India Ratings#	CARE@
Fixed Deposits	Long-Term	AA+/Stable	-	-
Long-Term/ Subordinated Debt/ Tier II Bond	Long-Term	AA/Stable	AA/Stable	AA/Stable
Certificate of Deposits	Short-Term	A1+	A1+	A1+

Note:

*CRISIL rating upgraded long-term rating to AA/Sable from AA-/Positive and reaffirmed Short-Term Ratings to A1+ and also upgraded FD ratings to AA+/Stable from FAA+/Positive on June 29, 2022. CRISIL assigned AA/Stable to Tier II Bond and withdrawn the ratings of Subordinated Debt as the Bank has repaid the term loan in full on July 7, 2022

#India Ratings upgraded long-term Tier II bonds ratings to AA/Stable from AA-/Stable, reaffirmed Short-Term Ratings to A1+ and has withdrawn the ratings of Subordinated Debt & Bank Facilities as the Bank has repaid the term loan in full on July 22, 2022.

@CARE Ratings has reaffirmed the Long-Term Tier-II Bond Rating to AA/Stable and reaffirmed rating of Certificate of Deposits to A1+ on April 4, 2023.

The above rating details is available on the website of the Bank and can be accessed at https://www.aubank.in/credit-rating

E. Change in Nature of Business

During the year under review, there were no changes in the nature of business of the Bank.

F. Transfer to Reserves

In terms of RBI regulations and other applicable regulations, the Bank has proposed to transfer the following amounts to various reserves for the financial year ended March 31, 2023 as mentioned below:

Amount transferred to	Amount (D in crore)
Statutory Reserve	356.98
Transfer to Special Reserve U/s 36 (1) (viii)	115.00
Transfer to Capital Reserve	2.52
Transfer to Investment Fluctuation Reserve	17.20

During the year under review, no amount was transferred to general reserves by the Bank.

G. Transfer to the Investor Education and Protection Fund ("IEPF")

In accordance with Section 124 and 125 of the Companies Act, 2013 ("Act") read with applicable rules, as amended, there was no unclaimed/unpaid dividend or shares liable to be transferred to the IEPF during the FY 2022-23.

Further, details of the unclaimed/un-encashed dividends lying in the unpaid dividend accounts as on end of the financial year are provided on website of the Bank at https://www.aubank.in/investors/investor-services.

H. Deposits

Being a Banking company, the disclosures required under Rule 8(5)(v) & (vi) of the Companies (Accounts) Rules, 2014 read with Sections 73 and 74 of the Act and Companies (Acceptance of Deposits) Rules, 2014 are not applicable. The details of the deposits received and accepted by your Bank as a Banking company have been disclosed in the financial statements for the financial year ended March 31, 2023.

I. Capital Structure & Fund Raising

Authorised Share Capital

During the period under review, the Authorised Share Capital of the Bank increased from C350 crore to C1,200 crore comprising of 1,20,00,00,000 equity shares of C10 each.

Paid-up Capital

Pursuant to the below allotments of equity shares, the total issued, and paid-up equity share capital of the Bank increased by C351.85 crore to C666.75 crore as on March 31, 2023 as compared to C314.90 crore as on March 31, 2022.

• Bonus Issue

During the year, the Bank had allotted 31,50,93,233 equity shares of C10 each as fully paid-up Bonus Equity Shares to the eligible shareholders as on the record date i.e. June 10, 2022 in the proportion of 1:1, i.e., 1 (One) bonus equity share for every 1 (One) fully paid-up equity shares held. The shareholders approved the above issue of bonus shares vide postal ballot dated May 29, 2022.

• Qualified Institutions Placement

Pursuant to the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the Act and considering the growth aspirations, your Bank successfully completed Qualified Institutions Placement ("QIP") of 3,44,82,758 equity shares of face value of C10 each at an issue price of C580 per Equity Share (including a security premium of C570 per Equity Share) on subscription by Qualified Institutional Buyers ("QIB") aggregating to C2,000 crore. The issue was opened on August 3, 2022 and allotment of Equity shares were made on August 9, 2022.

With respect to disclosure under Regulation 32(7A) of SEBI Listing Regulations, the Audit Committee of the Board at its meeting held on October 19, 2022, had reviewed, and confirmed that the funds raised through QIP issue during the year have been fully utilised for the intended object as mentioned in the private placement document and there was no deviation or variation in utilisation of the said funds. Further, No allotment was made to Promoter and Promoter Group under QIP.

• Allotment of Equity Shares pursuant to exercise of Stock Options

The Board of Directors allotted 22,69,033 equity shares pursuant to exercise of ESOP under different ESOP Schemes.

Non-convertible Debentures ("NCDs")

During the year, your Bank has successfully raised Tier-II capital of C500 crore by way of private placement by issuing 500 (Five Hundred) 9.30% Unsecured, Not guaranteed, Subordinate - Tier 2 - Lower, Taxable, NonCumulative, Rated, Redeemable, Non-Convertible Debentures having a face value of C1,00,00,000 (Rupees One crore only) each for cash.

Accordingly, total outstanding NCDs stood at C1,000 crore as on March 31, 2023 against C500 crore as on March 31, 2022.

Details of outstanding NCDs as on March 31, 2023 are as below:

N ISIN No.	Series	Amount (D in crore)	Date of Issue	Date of Allotment	Date of Maturity
1. INE949L08418	-	500	April 26, 2018	November 30, 2018	May 30, 2025
2. INE949L08442	Series I Debentures	350	July 29, 2022	August 3, 2022	August 3, 2032
3. INE949L08434	Series II Debentures	100	July 29, 2022	August 3, 2022	August 13, 2032
4. INE949L08426	Series III Debentures	50	July 29, 2022	August 3, 2022	August 23, 2032

The Audit Committee of the Board at its meeting held on October 19, 2022, had reviewed, and confirmed that the Bank had utilised the said funds for the intended object as mentioned in offer document and there was no deviation or variation in utilisation of the said funds.

J. Employee Stock Option Schemes

Your Bank has formulated several Employee Stock Option Schemes ("Schemes"), which have been duly approved by the shareholders of the Bank. The Schemes have been devised in accordance with the SEBI (Share-Based Employee Benefits) Regulations, 2014 read with SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021 ("SBEB & SE Regulation - 2021") as amended from time to time.

The Option grants to employees under the schemes are approved by the Nomination and Remuneration Committee ("NRC") in terms of Compensation Policy of the Bank, as part of Annual Performance Review of employees performance and at the time of hiring. Several factors including scale, designation, performance, grades, period of service, criticality of role and their contribution for the Banks overall performance is taken into consideration for deciding number of options to be granted to the employees.

The Bank had following Employee Stock Option Schemes as on March 31, 2023:

• Employee Stock Option Scheme 2015 - Plan A (ESOP 2015 - Plan A)

• Employee Stock Option Scheme 2015 - Plan B (ESOP 2015 - Plan B)

• Employee Stock Option Scheme 2016 - (ESOP 2016)

• Employee Stock Option Scheme 2018 - (ESOP 2018)

• Employee Stock Option Scheme 2020 - (ESOP 2020)

The details of vesting of various schemes are as follows:

ESOP Scheme & Plan	Vesting Period	% of vesting of Options
ESOP 2015 - Plan A	1 year from the date of grant or at the time of IPO whichever is later	20%
	Expiry of 1 year from 1st vesting	30%
	Expiry of 2 years from 1st vesting	50%
	Total	100%
ESOP 2015 - Plan B	1 year from the date of grant or at the time of IPO whichever is later	20%
	Expiry of 1 year from 1st vesting	30%
	Expiry of 2 years from 1st vesting	50%
	Total	100%
ESOP 2016	Options granted under this scheme would vest after one year but not later than six years from the date of grant of options	100%
ESOP 2018	Options granted under this scheme would vest after one year but not later than six years from the date of grant of options	100%
ESOP 2020	Options granted under this scheme would vest after one year but not later than six years from the date of grant of options	100%

Note: Options granted may be exercised within four years from the date of first vesting of the options under ESOP 2015 and six years from the date of first vesting of the options under ESOP 2016, ESOP 2018, and ESOP 2020. The term of vesting is also mentioned as per terms of grant approved by NRC in the grant letter issued to employees.

The Brief Details of Existing ESOP Schemes as on March 31, 2023 is given below:

Particulars	ESOP Plan A 2015	ESOP Plan B 2015	ESOP Scheme 2016	ESOP Scheme 2018	ESOP Scheme 2020
Date of Shareholders Approval	31-Aug-15	31-Aug-15	10-Oct-16	07-Aug-18	23-Dec-20
Total Number of Options approved (Pre Bonus)	38,36,058	49,33,194	21,00,000	49,33,200	50,00,000
Increase in Number of options due to Bonus	39,425	1,60,243	10,71,733	31,27,329	49,96,200
Total Number of Options approved (Post Bonus)	38,75,483	50,93,437	31,71,733	80,60,529	99,96,200
Total Number of options outstanding at the Beginning of the period@	1,18,000	22,000	11,04,139	28,84,340	16,23,695
Particulars	ESOP Plan A 2015	ESOP Plan B 2015	ESOP Scheme 2016	ESOP Scheme 2018	ESOP Scheme 2020
Total Number of Options granted (during FY 2022-23)	-	41,000	37,468	6,11,828	50,98,223
Total Number of Bonus Options Issued during the FY 2022-23	-	22,000	10,54,575	28,35,939	16,22,925
The Pricing Formula (per share)	C10.11	C16.69 (C33.37 prior to Bonus Issue)	Market Price Linked#	Market Price Linked	Market Price Linked
Options Vested (during FY 2022-23)@	-	11,200	4,17,278	26,42,164	6,27,176
Options Exercised (during FY 2022-23)	1,18,000	-	3,00,397	17,84,285	66,351
Total Number of shares arising as a result of exercise of option	1,18,000	-	3,00,397	17,84,285	66,351
Options lapsed/Forfeited (during FY 2022-23)@	-	-	44,033	1,45,346	4,70,897
Total Number of options exercisable at the end of the year@	-	16,000	6,17,020	19,56,556	5,76,857
Total Number of options outstanding at the end of the year@	-	85,000	18,51,752	44,02,476	78,07,595
Variation in terms of options	Appropriate adjustments with respect to the exercise price and/or the number of stock options were made to give effect of bonus issue completed during FY 2022-23 for options which were available for grant and those already granted but not exercised as on Record Date. No variation in terms of options were made during the FY 2022-23.
Money realised by exercise of Options (during FY 2022-23) (in C)	11,92,980.00	-	6,21,31,266.00	59,31,30,686.50	3,72,79,984.00
Total Number of Options granted to Key Managerial Personnel			Refer Note 1
Any other employee who received a grant in any one year of options amounting to 5% or more of options granted during that year	Nil	Nil	Nil	Nil	Nil
Identified employees who are granted options, during any one year equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Bank at the time of grant	Nil	Nil	Nil	Nil	Nil
Diluted Earnings Per Share (EPS) of the Bank after considering the effect of potential equity shares on account of exercise of Options		Please refer Note 2
Impact of the difference between the Intrinsic Value of the Options and the Fair Value of the Options on Profits and on EPS		Please refer Note 2
Weighted average share/exercise price of the shares exercised during the year (in C)	C10.11	-	C206.83	C332.42	C561.86

Weighted average fair values of the outstanding options (in C)

Please refer point no. 25 of B. Other Disclosures of Schedule 18 of Notes to accounts to Audited Financial Results for FY 2022-23

@In terms of SEBI circular dated June 15, 2021 regarding relaxation from the requirement of minimum vesting period in case of death of employee(s) and provisions of the SEBI (Share-Based Employee Benefit and Sweat Equity) Regulations, 2021, options granted to employees who have demised, have been vested in the legal heirs or nominees of the deceased employees immediately. The numbers given above include the options vested in legal heirs/nominees of deceased employees.

#Pricing for ESOP Scheme 2016 was changed from fixed price of 140 to market linked price with the approval of shareholders obtained in the Annual General Meeting held on July 19, 2019.

Note 1

Sr .. Name of Official No.	Designation	Number of Options Granted in
		ESOP 2018	ESOP 2020
1 Uttam Tibrewal	Whole-Time Director	-	54,136
2 Vimal Jain	Chief Financial Officer	22,781	-
3 Manmohan Parnami	Company Secretary	-	13,546
Grand Total		22,781	67,682

Note 2

The Securities and Exchange Board of India ("SEBI") has prescribed two methods to account for stock grants; namely (i) the intrinsic value method; (ii) the fair value method. The Securities and Exchange Board of India ("SEBI") has prescribed two methods to account for stock grants: namely (i) the intrinsic value method; (ii) the fair value method. The Bank adopts the intrinsic value method to account for the stock options grants to the employees. Further, the Bank calculates the fair value of options at the time of grant using Black- Scholes pricing model for Whole-Time Directors, Chief Executive Officers/Material Risk Takers and Control Function staff as per RBI guidelines dated November 4, 2019 with the following assumptions:

Particulars	March 31, 2023
Risk free interest rate	7.12% - 7.45%
Expected life	3 Year - 5.5 Year
Expected volatility	41.37% - 48.62%
Expected dividends	0.08% - 0.10%

Had the Bank used the fair value model to determine the compensation, its profit after tax and earnings per share as reported would have changed to the amounts indicated below:

(C in crore)

Particulars	Year ended March 31, 2023	Year ended March 31, 2022
Profit after tax as reported	1,427.93	1,129.83
Add: ESOP Expense already booked (net of tax)	15.53	13.76
Less: ESOP cost using fair value method (net of tax)	77.62	48.53
Profit after tax (adjusted)	1,365.84	1,095.06
Earnings Per Share
Basic
- As reported	21.86	18.03
- Adjusted for ESOP cost using fair value method	20.91	17.48
Diluted
- As reported	21.74	17.85
- Adjusted for ESOP cost using fair value method	20.79	17.30
		(C in crore)
Particulars	As on March 31, 2023	As on March 31, 2022
Stock options outstanding (gross)	229.16	203.94
Deferred compensation cost outstanding	30.67	26.16
Stock options outstanding (net)	198.49	177.78

I n accordance with SBEB & SE Regulation - 2021 necessary disclosures are made in Schedule 18 - Notes forming part of the financial statements for FY 2022-23 and are included in the annual report and also disclosed on the website of the Bank at https://www.aubank.in/reports/disclosures.

K. Detail of Board of Directors and Key Managerial Personnel

The composition of the Board of Directors of the Bank ("Board") is governed by the provisions of the Act, the Banking Regulation Act, 1949 ("BR Act"), the SEBI Listing Regulations other applicable laws, and the Articles of Association of the Bank. At the end of March 31, 2023, the Board of your Bank had 10 Directors, out of which 8 were Independent Directors and 2 were Executive Directors.

During the FY 2022-23 and up to the date of this report, following changes took place in the Board of Directors and Key Managerial Personnel of the Bank:

Appointments

1. Mr. Kamlesh Shivji Vikamsey (DIN: 00059620) was appointed as Additional Director (Independent) for a period of 3 years with effect from April 25, 2022 to April 24, 2025. Further, shareholders vide resolution passed through postal ballot approved his appointment as Independent Director on May 29, 2022.

2. Ms. Malini Thadani (DIN: 01516555) was appointed as Additional Director (Independent) of the Bank to hold office for a period of 3 years with effect from November 25, 2022 up to November 24, 2025. Further, shareholders vide resolution passed through postal ballot approved her appointment as Independent Director on December 30, 2022.

3. Ms. Kavita Venugopal (DIN: 07551521) was appointed as Additional Director (Independent) of the Bank to hold office for a period of 3 years with effect from March 29, 2023 up to March 28, 2026. Further, shareholders vide resolution passed through postal ballot approved her appointment as Independent Director on April 30, 2023.

Re-appointments

4. Re-appointment of Mr. Mankal Shankar Sriram and Mr. Pushpinder Singh, Independent Directors for a second term for a period of 3 years commencing from October 21, 2022 to October 20, 2025 and of Mr. Kannan Gopalaraghavan Vellur, Independent Director for a second term for a period of 3 years commencing from January 22, 2023 to January 21, 2026 has been approved by the shareholders in its 27^th AGM held on August 23, 2022 after taking into the consideration the balance of skills, knowledge, qualifications, experience and basis the fit and proper assessment carried out by the NRC & Board.

5. With the approval of the Board of Directors at their meeting held on October 10, 2022, the proposal for re-appointment of Mr. Raj Vikash Verma (DIN: 03546341) as Part-time Chairman (Independent Director) of the Bank for a period from April 8, 2023 till January 29, 2024, was submitted to RBI. The proposal has been approved by RBI for the above-mentioned period and communicated vide its letter dated February 22, 2023. Further, shareholders vide resolution passed through postal ballot has already approved his re-appointment as Part-Time Chairman (Independent Director) on November 12, 2022.

6. Re-appointment of Mr. Sanjay Agarwal (DIN: 00009526) as Managing Director & CEO and Mr. Uttam Tibrewal (DIN: 01024940) as Whole-Time Director has been approved by RBI vide its letter dated April 12, 2023, for a period of 3 (three) years w.e.f. April 19, 2023 till April 18, 2026. Further, shareholders vide resolution passed through postal ballot has already approved their re-appointment on March 9, 2022 vide resolution passed through postal ballot.

7. In accordance with the provisions of Section 152 of Act, Mr. Sanjay Agarwal, Managing Director & CEO retired by rotation at the previous AGM and shareholders approved his re-appointment. Further, Mr. Uttam Tibrewal, Whole-Time Director of the Bank shall retire by rotation at the ensuing AGM and being eligible for reappointment, offers himself for re-appointment.

Completion of Tenure

8. Mr. Krishan Kant Rathi (DIN: 00040094) and Ms. Jyoti Narang (DIN: 00351187) ceased to be the Independent Directors of the Bank with effect from March 29, 2023 (close of business hours) on completion of their tenures. The Board hereby places on record its sincere appreciation for Mr. Krishan Kant Rathi and Ms. Jyoti Narang for guidance and wisdom to Board during their tenure.

During the year, no other change took place in the Board of Directors or in Key Managerial Personnel of the Bank. The composition of the Board of Directors and Key Managerial Personnel of the Bank was compliant with the applicable regulatory norms.

Further, none of the directors have been debarred from holding office as director by virtue of any order of the SEBI or any other authority.

L. Code of Conduct for Directors and SMPs

In accordance with Regulation 17(5) of SEBI Listing Regulations, the Bank has adopted the Code of Conduct for Directors and Senior Management Personnel ("SMPs"). The code of conduct sets forth the guiding principles for orderly & fair conduct by Directors and SMPs. All Directors and SMPs have affirmed the compliance of the code for the FY 2022-23 and a declaration to this effect signed by the MD & CEO forms part of Report on Corporate Governance annexed with Boards Report as Annexure - I. The Banks Code of Conduct for Directors and SMPs is disclosed on the website of the Bank at https://www.aubank.in/investors/secretarial- policies.

M. Number of Meetings of Board

During the period under review, Sixteen (16) Board Meetings were held and the gap between the said meetings did not exceed the limit of 120 days as prescribed under the provisions of Act and Rules made thereunder, Secretarial Standard-I Issued by the Institute of Company Secretaries of India and provisions of SEBI Listing Regulations. The dates of Board meetings and details of attendance of each Director have been disclosed in the Report on Corporate Governance annexed with Boards Report as Annexure-I.

N. Committees of the Board

The Bank believes that Board Committees are critical to promote best Corporate Governance practices within the Bank. Accordingly, the Bank has constituted various Board Committees to improve the Board effectiveness and to support in decision-making. The constitution of these Committees is in compliance of provisions of the Act and relevant rules made thereunder, SEBI Listing Regulations, BR Act, RBI Circular & Guidelines, Articles of Association of the Bank and other guidelines issued from time to time.

Further, in view of completion of tenure of Mr. Krishan Kant Rathi & Ms. Jyoti Narang as Independent Directors on the Board w.e.f. March 29, 2023 (closure of business hours) and appointment of Ms. Kavita Venugopal as an Independent director w.e.f. March 29, 2023, the Board of Directors at their meeting held on March 10, 2023 have approved the revised constitution of Board Committees effective from March 30, 2023. The details of the Board Committees of the Bank including, constitution, their scope, number & date of meetings held during FY 2022-23 and attendance thereof are disclosed in the Report on Corporate Governance annexed with Boards Report as Annexure-I.

O. Meeting of Independent Directors

As per the requirement of the Section 149(8) read with Schedule IV of Act and Regulation 25 of SEBI Listing Regulations, a meeting of the Independent Directors of the Bank is required to be held at least once a year in absence of non-independent directors.

During the year under review, the Independent Directors of the Bank met 2 (Two) times on April 25, 2022 and on March 10, 2023, chaired by Mr. Raj Vikash Verma and attended by all the Independent Directors of the Bank and discussed & reviewed inter alia below matters:

• Performance of Non-Independent Directors, the Board of Directors as a whole, and Chairperson of the Bank.

• Assessed the quality, quantity, and timeliness of flow of information between the management of the Bank and the Board of Directors that is necessary for the Board of Directors to perform their duties effectively and reasonably.

• Assessed whether adequate time is spent by the Board/Committees on discussions on important issues.

• Reviewed the criteria for evaluation of performance of Board Committees.

• Familiarisation Programme held during the year.

• Reviewed the revised composition of Board Committees of the Bank.

P. Familiarisation Programme for Independent Directors

I n accordance with Regulation 25(7) of SEBI Listing Regulations and RBI guidelines, the Bank conducted various familiarisation programme during FY 2022-23 for the Independent Directors to enable them to familiarise with the Bank, its Management, Banks Business, and its operations for better understanding of their responsibilities, roles, and rights for effective contribution in sustainable growth of the Bank.

The Details of familiarisation programme and other sessions organised for Independent Directors during FY 2022-23 is disclosed in the Report on Corporate Governance annexed with Boards Report as Annexure-I and on the website of the Bank under https://www.aubank.in/investors/secretarial-policies.

Q. Declaration of Independence

In accordance with provisions of Sections 149(6) and 149(7) of the Act, Schedule IV and Regulation 16(1)(b) and 25(8) of the SEBI Listing Regulations, the Bank has received necessary declarations/disclosures from all the Independent Directors confirming that they meet and comply with the criteria of independence.

All the Independent Directors possesses requisite domain knowledge, experience, expertise, integrity, and proficiency as required under the Code applicable for Independent Directors as stipulated under Schedule IV of the Act and in terms of policies of the Bank.

R. Compensation Policy for appointment and remuneration of Directors, Key Managerial Personnel, Senior Management Personnel, Material Risk Takers (MRTs) and Control Function Staff

In accordance with the provisions of Section 178(3) of the Act read with relevant rules made thereunder, SEBI Listing Regulations, RBI guidelines and on the recommendation of the NRC, the Bank has formulated and adopted a compensation policy for appointment and remuneration of its Directors, Key Managerial Personnel ("KMP"), Senior Management Personnel ("SMP"), Material Risk Takers ("MRTs") and Control Function Staff.

Compensation policy regulates the appointment and remuneration of Directors (including Independent Directors), KMP, SMP, MRTs and Control Function staff as applicable in accordance with criteria formulated by the NRC of the Board under the requirement of the Act read with applicable Rules under the Act and SEBI Listing Regulations and other applicable guidelines.

The key objectives of policy are as under:

• Establish standards on compensation/remuneration including fixed and variable pay - covering share- linked instruments, which are in alignment with the applicable rules and regulations and is based on the trends and practices of remuneration prevailing in the industry.

• Retain, motivate, and promote talent and to ensure long-term sustainability of talented WTDs, KMPs, SMPs, MRTs, Control Function Staff and other employees as applicable.

• Define internal guidelines for payment of other reimbursement to the Directors and KMPs.

• Institutionalise a mechanism for the appointment/ removal/ resignation/evaluation of performance of Directors.

• Perform such functions as are required to be performed by the NRC under the Securities and Exchange Board of India (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021, including the following:

(a) administering the ESOP plans;

(b) determining the eligibility of employees to participate under the ESOP plans;

(c) granting options to eligible employees and determining the date of grant;

(d) determining the number of options to be granted to an employee;

(e) determining the exercise price under the ESOP plans; and

• Ensure compliance with applicable laws, rules, and regulations as well as Fit and Proper criteria of directors before their appointment.

The policy is reviewed by the Board of Directors in addition to the other amendments that may be required in the policy. The Policy is hosted by the Bank on its website at https://www.aubank.in/investors/secretarial- policies.

The terms of reference of the NRC and Compensation Policy have been provided in Report on Corporate Governance annexed with Boards Report as Annexure-I.

S. Evaluation of the Directors, the Board and Committees

I n accordance with the provisions of Section 149(8) read with Schedule IV, Section 178(2) of the Act, Regulation 17 and other applicable Regulations of SEBI Listing Regulations, and in consonance with Guidance Note on Board Evaluation issued by the SEBI, the Board assesses the performance of the Individual Director, Board Committees and Board as a whole on the basis of various criteria with the aim to improve the effectiveness of the individual Director, Committees and the Board.

The description and process of annual performance evaluation has been provided in Report on Corporate Governance annexed with Boards Report as Annexure-I.

T. Statutory Auditors and their Report

In accordance with the Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) dated April 27, 2021 ("RBI Guidelines") issued by RBI, Banks shall appoint the Statutory Auditors for a continuous period of three (3) years, subject to the firms satisfying the eligibility norms each year and the approval of RBI on an annual basis.

M/s. Deloitte Haskins and Sells, Chartered Accountants (Registration No. 117365W) and M/s. G. M. Kapadia & Co., Chartered Accountants (Registration No. 104767W) were appointed as the Joint Statutory Auditors for a period of Three (3) years by the Shareholders of the Bank at the 26^th AGM held on August 17, 2021, to hold office from the conclusion of the 26^th AGM till the conclusion of the 29^th AGM of the Bank subject to the approval of the RBI on annual basis.

There are no qualifications, reservations or adverse remarks made by M/s. Deloitte Haskins and Sells, Chartered Accountants and M/s. G. M. Kapadia & Co., Chartered Accountants, Joint Statutory Auditors of the Bank, in their report on the financial statements for the FY 2022-23. Further, pursuant to Section 143(12) of the Act the Statutory Auditors of the Bank have not reported any instances of frauds committed in the Bank by its officers or employees.

The Statutory Auditors have confirmed their eligibility under Section 141 of the Act and as per the guidelines issued by RBI from time to time. Further, as required under the relevant provisions of SEBI Listing Regulations, the Statutory Auditors had also confirmed that they had subjected themselves to the peer review process of the Institute of Chartered Accountants of India ("ICAI") and they hold a valid certificate issued by the Peer Review Board of ICAI.

U. Secretarial Auditors and their Report

I n accordance with the provisions of Section 204 of the Act and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 and Regulation 24A of SEBI Listing Regulations and upon recommendation of the Audit Committee, the Bank has appointed M/s. V. M. & Associates, Company Secretaries (Registration No. P1984RJ039200) to undertake the Secretarial Audit of the Bank for the financial year ended March 31, 2023.

During the year under review, pursuant to provisions of the Section 143(12) of the Act no frauds have been reported by the Secretarial Auditors, and there were no observations or qualifications made by the Secretarial Auditors in their Report. The Secretarial Audit Report for FY 2022-23 in form MR-3 is annexed with Boards Report as Annexure-IV.

V. Particulars of Loans, Guarantees and Investments

In accordance with the provisions of Section 186(11) of Act the provisions of Section 186 of the Act except sub-section (1), do not apply to loans made, guarantees given or securities provided or acquisition of securities by a Banking company in the ordinary course of business and are exempted from disclosure requirement in the Annual Report.

However, the particulars of investments made by the Bank are disclosed in Schedule 8 of the Financial Statements for FY 2022-23, forming part of this Annual Report, as per the applicable provisions of BR Act.

W. Related Party Transactions

During FY 2022-23, the Bank has not entered into any materially significant transaction with its related parties, which could lead to a potential conflict of interest between the Bank and these parties. All the related party transactions that were entered into during the year were on an arms length basis and in ordinary course of business.

The Audit Committee of the Board has given omnibus approval for related party transactions of repetitive nature and entered in the Ordinary Course of Business. Further, the Audit Committee of the Bank reviewed details of all related party transaction entered by the Bank on quarterly basis.

Hence, pursuant to Section 134(3)(h) of the Act read with Rule 8(2) of the Companies (Accounts) Rules, 2014, there are no related party transactions that are required to be reported in form AOC-2. The requisite disclosure has been made under Schedule 18 of the notes forming part of audited financial statements for the financial year ended March 31, 2023.

The Policy on Related Party Transactions and Materiality as approved by the Board is available on the website of the Bank at https://www.aubank.in/investors/secretarial-policies.

X. Material Changes and Commitments, if any, affecting the Financial Position of the Bank

There are no material changes and commitments which affect the financial position of the Bank which have occurred between the end of the financial year i.e. March 31, 2023 up to the date of this Report.

Y. Conservation of Energy, Technology Absorption & Foreign Exchange Earnings and Outgo

Since inception, your Bank has operated responsibly towards environment sustainability. The Bank has taken proactive measures to address its emissions footprint by leveraging digital interventions, and implementing emission reduction initiatives wherever possible.

(a) Conservation of Energy

Steps taken or impact on conservation of energy, utilising alternate sources of energy and capital investment on energy conservation equipments:

Your Bank has launched a gamut of initiatives that are a testimony of Banks strong intent towards simplifying Banking by eliminating unnecessary steps and enabling smooth onboarding of customers while reducing negative impact on the environment. The Bank has undertaken the following initiatives for conservation of energy:

• AC capacity planning ensures optimal sizing to prevent over consumption of energy.

• Energy-efficient Star Rated equipments are installed for saving of electricity cost.

• Bank promotes green plant & garden in premises to reduce air conditioning load.

• Installation of an i-Touch manager to help monitor and control electricity usage, reducing consumption by 20% and preventing pilferage.

• Variable Refrigerant Volume (VRV) based Chiller used for energy usage reduction in ACs.

• Insulation used to minimise Heat load in offices and to reduce the need for excessive air conditioning.

• Use of LED instead of tradition lighting to reduce electricity consumption.

• Natural Sunlight is maximised through Green Building design in Offices to the extent possible to reduce reliance on artificial lighting to the extent possible.

• Installation of Timer for signages to optimise energy usage.

• Power factor system installed in Electrical panel for optimum usage of electricity.

• UPS & Inverter used to minimise reliance on Diesel generator set.

As part of Banks commitment to environmental responsibility and to conserve energy, Bank installed a 1.25-Megawatt Solar plant a renewable source of energy that is long-lasting source, thereby resulting into numerous benefits, including reducing energy and carbon intensities, saving of cost, minimising environmental impact, mitigating climate change, and conserving water resources.

Using power supervision technology and guidelines: With installation of range of tools and systems that are designed to monitor, control, and optimise power usage in existing buildings and assets of the Bank, increased energy efficiency is achieved through the replacements and lighting retrofits including installation of intelligent energy management devices among other measures.

Using Cloud based technology and virtualised info Centre: Your Bank strives to channelise its efforts and investment towards infrastructure development in the digital space. The Bank makes use of virtual machines and cloud-based technologies to create a virtual ecosystem. This not only reduces dependency on physical servers thereby reducing operational wattage and space, new, energy efficient, reliable, and vastly advanced cloud-based systems have been put in place.

Being a technology absorption measure as well, Bank shall be immensely benefited with virtualisation of server where there will be saving energy cost due to high availability under cloud based technology, reduced need for on premises physical servers, scalability, workload sharing, elasticity, and rapid resource provisioning etc., thereby achieving enhanced efficiency, flexibility, and cost-effectiveness.

Recycling systems and supplies: Your Bank also practices highly efficient management methods to refurbish aging IT systems. This is carried out to avoid sending hazardous materials into huge landfills and scaling down the load on already overburdened junkyards. The Bank also employs a coherent system of recycling slightly older IT systems by assigning them to the staff that does not need to perform heavy data processing on their system. By doing so, the Bank successfully reduces the demand for new desktops and laptops even with the growing workforce.

Scrap Disposal

There is limited scope for Scrap build up & disposal as the Bank is into financial Services Space. Further, in respect of IT Assets, the same were disposed through E-Waste vendor and details are covered in the Business Responsibility and Sustainability Report of FY 2022-23 annexed with Boards Report as Annexure-V.

(b) Technology Absorption

I) The efforts made towards Technology absorption:

1. Digital Banking: The Bank witnessed strong growth in the adoption of Tab-based account opening, Android-based Mobile Banking, WhatsApp Banking (24/7 Banking solutions), and Net Banking, thus minimising paper usage, reducing waste generation, and achieving improved waste management.

2. AU 0101 App: This app enables the customers to Bank from anywhere and which contributes to reducing carbon footprint through a video-enabled chat with Banks executives, eliminating the need to travel.

3. Video Banking: Launched Video Banking with a vision of offering all Banks services virtually through video-enabled chat with branch executives, eliminating the need for Branch visits. This initiative helped two-fold in promoting Digital Banking and inspiring customers to adopt a more environmentally sustainable Banking channel and saving of fuel by reducing commutation.

4. E-receipts Culture: E-receipts at ATMs, followed by a detailed SMS regarding the last transaction and Bank balance sent to the customers registered mobile number, resulting in reduced consumption of paper.

II) The benefits derived like product improvement, cost reduction, product development or import substitution:

Bank is continuously taking various steps on the product improvement. Bank is in the process of implementation of new and upgraded version of ITAM tool (IT asset management tool). This tool will manage all Banks IT assets life cycle i.e., from procurement to scrap and disposal of asset, for PAN INDIA banking operations. Highly efficient use of technology through software helps in save time, improve efficiency, reduce costs, improve productivity, more agile and helps in information security.

III) In case of imported technology (imported during the last three years reckoned from the beginning of the financial year):

a) The details of technology imported: Nil

b) The year of import: Nil

c) Whether the technology been fully absorbed: Nil

d) If not fully absorbed, areas where absorption has not taken place, and the reasons thereof: Nil

IV) Expenditure incurred on Research and Development:

Since financial services is being primarily covered under Service Sector, the details of this clause are not applicable to the Bank.

(c) Foreign Exchange Earnings and Outgo

During the financial year ended March 31, 2023, the foreign exchange earnings was C3.53 crore and the foreign exchange outgo was C12.31 crore.

Z. Risk Management

Your Bank operate in a highly dynamic, evolving, competitive and strict regulatory environment. Constantly identifying the emerging and evolving risks for Banks business is critical to protect the business sustainability. Proactive steps are taken to contain and mitigate these risks which helps to safeguard the interests of Banks stakeholders.

The nature of Risk in a Banking Industry are of wide array evolving around Credit Risk, Market & Liquidity Risk, Operational Risk, IT and Cyber Security Risk, Compliance Risk, and other risks. Your Bank has adopted a multi-layered risk management process to identify, assess, monitor, and manage risks through the effective use of processes, information, and technology.

Banks robust risk management framework has evolved over the years under the supervision of highly experienced Board and senior leadership. Bank approach is to ensure that it understand these risks well in order to respond to them in a timely manner. This translates into consistent risk management practices to measure, monitor, control, and mitigate risks. This approach is translated into Banks daily risk management practices, which encompass the measurement, monitoring, control, and mitigation of risks. By actively engaging in these practices, Bank aim to proactively contain and address potential threats to Banks business. This proactive stance ensures that Bank stay ahead of the curve and are well-prepared to handle any challenges that may arise in ever-changing industry and regulatory landscape.

The Banks risk management is governed by the three Lines of Defence. First Line of Defence consists of individual business units and support functions that own and manage risks through adherence to laid-down procedures.

Second Line of Defence consists of the Risk Management and Compliance departments which ensure the First Line of Defence is properly designed, is in place and operating as intended through regular reporting.

Third Line of Defence consists of the Internal Audit function, which provides the highest level of independent assurance on the effectiveness of governance, risk management and internal controls through audit in line with the approved audit plan and reporting the same to the Audit Committee of the Board on a regular basis.

Collectively, these three functions provide assurance to the Board that the risks assumed by the Bank are within the risk appetite approved by the Board and the adequacy and effectiveness of the governance framework around the risks for Banks business.

The Risk Management policies act as guiding principles for implementation of risk management framework in the Bank. The Board is supported by an experienced executive management team, Board Committees, and Board Delegated Committees as part of the Risk Governance Framework. The Board ensures a balance between growth and prudent risk management while creating value for stakeholders. To comply with regulatory provisions, the Bank has established a Risk Management Committee that oversees the implementation of the risk governance framework and guiding principles. The Bank has appointed a Chief Risk Officer (CRO) who administers various risk areas such as Credit Risk, Market & Liquidity Risk, Operational Risk, Fraud Risk, Information Security Risk, Compliance Risk, and other risks. The CRO works in accordance with the approved risk management policies and the delegation matrix, and has direct access to the Risk Management Committee. The CRO plays a key role in making risk management decisions that impact the Banks strategic direction and monitors the progress of risk management activities. The details of the Risk Management Committee and its terms of reference are set out in the Report on Corporate Governance annexed with Boards Report as Annexure-I.

The Risk Management framework is a layered structure and broadly consists of the following aspects for effective risk management across the Bank:

(a) Credit Risk Management

Risk: Credit risk arises from business operations that give rise to actual, contingent, or potential claims against any counterparty, borrower, or obligor. The scope of the Credit Risk unit includes measuring, assessing, and monitoring credit risk within the Bank through strengthening underwriting norms, keeping close watch on asset quality trends and concentrations at individual exposures as well as at the portfolio level.

Mitigation: Credit Committee and Credit Risk & NPA Management Committee ("CRNPAC") overseas and reviews the credit risk and is responsible for prudential limits on large credit exposures, asset concentration, portfolio management, loan review mechanism, risk concentration, monitoring and evaluation, provisioning, regulatory and other issues around it. All aspects of credit risk are governed by the Credit Risk Management Policy and other Policies. Your Bank has laid down prudential limits and caps on various aspects to control the magnitude of credit risk. The defined risk limits are forward-looking and are reviewed in sync with future business plans. Loan administration and monitoring is carried out through Portfolio Profiling, Early Warning Framework, Rapid Portfolio Review, and Annual Monitoring of High Value Customers and other risk activities.

The CRNPAC looks after credit risk assessment on quantitative and qualitative basis. The Bank has a defined mechanism for necessary action to be taken in case of any alarming situation. Key risk indicators are defined for all major products having significant contribution to asset book.

CRNPAC follow the guiding principles listed below:

• Ensure that a governance framework is established for an effective oversight, segregation of duties, monitoring and management of Credit Risk in the Bank.

• Ensure that the sourcing and approval of credit proposals are as per the defined strategies, systems, and processes.

• Ensure that guiding principles shall be laid down for the setting up and monitoring of the credit and credit risk appetite and limits.

• Establish standards to facilitate effective identification and assessment of credit risks in the Bank.

• Establish standards for effective measurement and monitoring of credit risk and NPA.

• Ensure adherence to the guidelines/policies related to credit, credit risk and NPA management as issued by the RBI from time to time.

The Board Delegated Credit Committees submit their updates to Risk Management Committee of the Board at regular intervals.

(b) Operational Risk Management

Risk: Operational Risk has been defined by the RBI as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This definition includes Legal Risk but excludes strategic and reputational Risk.

Mitigation: The Bank has the Board delegated Operational Risk Management Committee ("ORMC") to oversee implementation of the operational risk management framework across the Bank and advise on implementation of measures for risk mitigation which further reports to Risk Management Committee of the Board. The Bank follows an integrated risk approach, where operational risks and its monitoring folds into CRO and ORMC. The Bank has in place a Board approved Operational Risk Management Policy which includes a comprehensive Operational Risk Management Framework for documenting, assessing, and periodic monitoring of various risks and controls linked to various processes across all business verticals.

Your Bank also has Risk Containment Unit that is guided by a Board approved Fraud Risk Management Policy. Fraud cases reported in the Bank are apprised to the Audit Committee and the Board and fraud cases in excess of C1 crore or more are specifically reported and dealt by the Special Committee for Fraud Monitoring ("SFMC") of the Board. The Bank is continuously strengthening its systems, operational practices and processes, procedures, controls, and review mechanism so that fraud-prone areas are sanitised against internal and external breaches and by continuously monitoring that these control measures are operating effectively.

With the Digital Banking services, the Bank has seen significant milestones in both at customer facing technologies and internal digitisation. To ensure safe and secure transactions and improve the customer experience at digital fronts, the Bank monitors the transactions on an ongoing basis. As your Bank prepares for the next step in the world of Digital Banking, it is confident that its technological capabilities will propel the next phase of growth in the coming years.

Your Bank has in place a comprehensive Outsourcing Risk Policy in line with RBI guidelines released on time-to-time basis keeping in view the extensive use of outsourcing by the Bank. Board has the ultimate responsibility for the outsourced activity. However, for ease of functioning, the powers have been delegated to the Risk Management Committee of the Board and Committee for Outsourcing of IT and Financial Services. The outsourcing policy document of the Bank lays down the framework adopted by the Bank for reviewing and approving outsourcing of services that includes plans and procedures to evaluate, assess, approve, review, control and monitor the risks and materiality of all its vendor/outsourcing activities and serve as a guidance to the Bank to adopt sound and responsive risk management practices for effective oversight, due diligence and management of risks arising from outsourcing activities.

Your Bank has in place a comprehensive Business Continuity Management plan, policy, and procedures in place to ensure continuity of critical operations of the Bank in the event of any disaster/incident affecting business continuity. The Banks business continuity Programme is developed considering the criticality of the functions performed and the systems have been designed to minimise the operational, financial, legal, and other material consequences arising from such a disaster and focus is on ensuring faster recovery of and minimising impact on the IT systems of the Bank. Your Bank has dedicated DR sites and there are periodic drills in place to validate effectiveness of Banks Business Continuity Plans ("BCP"). These controls helped Bank in taking immediate action in case of any business/application level issue arises which is leading to impact on Banking services/operations. The learning from the BCP drill exercises are used in refining the BCP framework.

(c) Market Risk, Liquidity and Asset Liability Management

Risk: Market Risk for the Bank originates from investment and trading in securities, which are undertaken both for the customers and on a proprietary basis. The market risk management framework of the Bank sets benchmark for market risk exposures, the performance of portfolios vis- a-vis the market risk limits and comparable benchmarks, which provide guidance to optimise the risk-adjusted rate of return of the Banks investment portfolio. Liquidity risk refers to Banks inability to fund an increase in assets or withdrawal of liabilities and meet both expected and unexpected cash & collateral obligations at reasonable cost without adversely impacting its financial condition.

Mitigation: Market risk management is guided by well-defined policies, guidelines, processes and systems for the identification, measurement, monitoring and reporting of exposures against various risk limits set in accordance with the risk appetite of the Bank. The Bank utilises the analytical tools for the market risk management of its trading and investment portfolios.

The Asset Liability Management Policy of the Bank stipulates a broad framework for liquidity risk management to ensure that the Bank is able to meet its liquidity obligations as well as to withstand a period of liquidity stress from Bank-level factors, market-wide factors, or a combination of both. The Board approved policy captures the risk appetite around the liquidity and market risk of the Bank and helps to put in place defined governance structure in consonance with the Banks Risk Appetite.

The Asset Liability Management Committee of the Bank oversees the framework for identification, measurement and management of market risk, interest rate risk and liquidity risk in the Bank and ensures compliance with established internal and regulatory prudential limits and operate within the approved risk appetite by the Board.

(d) IT Risk Management

Risk: Your Bank is growing with digitisation and aimed at leveraging digital technology to provide a best-in-class experience for its customers while simultaneously enhancing productivity and improve on IT risk management. Risk of cyber-attacks on your Banks systems arises among others from computer viruses, malicious or destructive code, phishing attacks, denial of service or information, application vulnerability and other security breaches resulting in disruption of its services or theft or leak of sensitive internal data or customer information.

Mitigation: Your Bank has established a robust information and cyber security framework for securing its IT infrastructure and systems. IT Steering Committee and IT Security Risk Management Committee reports to Board level IT Strategy & Information Systems Security Committee. This committee reviews and monitors IT security infrastructure and vigilance over IT related vulnerabilities against emerging cyber security risks. The Chief Information Security Officer ("CISO") is responsible for monitoring the information security risks covering all aspects of data security for the Bank who reports to CRO. Cyber Security Operation Centre with qualified professionals is reporting to CISO for monitoring of real-time cyber security glitches. Your Bank has also deployed advanced controls at various layers to ensure that cyber security risk in minimised.

(e) Reputation Risk Management

Risk: Reputation risk can negatively impact the Banks ability to attract or retain customers and expose it to litigation and regulatory action.

Mitigation: Your Bank assesses and manages Reputation Risk on periodic basis. Your Bank communicates with its stakeholders regularly through appropriate engagement mechanisms to address stakeholder expectations and assuage their concerns, if any. There is Zero tolerance for knowingly engaging in any activities that are not consistent with values, Code of Conduct, or policies of the Bank.

(f) Compliance Risk Management

Risk: The adoption of effective AML/KYC standards is an essential part of Banks Risk Management practices. Banks with inadequate Compliance (AML/KYC) risk management programmes may be subject to significant risks, especially legal and reputational risk. Sound Compliance (AML/KYC) policies and procedures not only contribute to a Banks overall safety and soundness and also protect the integrity of the banking system by reducing the likelihood of Banks becoming vehicles for money laundering, terrorist financing and other unlawful activities. Recent initiatives to reinforce actions against terrorism in particular have underlined the importance of Banks ability to monitor their customers wherever they conduct business.

Mitigation: The Bank has a dedicated Compliance Department that continuously monitors new developments and updates the Banks Board and senior management about its implications. The Bank has a strong compliance culture and have well-articulated policies with regard to conduct, Vigil Mechanism, AML & KYC, and engagement with third party vendors. Compliance & risk department update status of compliance & controls to Audit Committee Board on regular basis to review and advise on implementation of measures for AML/KYC risk mitigation along with effective Transaction monitoring.

AA.Corporate Social Responsibility

Your Bank has been financing the entrepreneurship aspiration of the unreached and unbanked masses of India. This has been further adopted in designing and implementing high impact CSR projects aimed at improving livelihoods of marginalised and vulnerable segment of the society. The CSR initiatives of the Bank is focused on Skills Development, Women Entrepreneurship, Rural Sports, among others, all of which have a profound positive impact on the targeted communities.

CSR activities and funds are monitored by the CSR Committee formed by the Board of Directors. Further, assessing the impact of these projects that would be carried out in the upcoming years.

Pursuant to CSR provisions of the Act and rules made thereunder, the Bank has transferred C8.26 crore in "Unspent Corporate Social Responsibility Account" for carrying out expenditure on its ongoing CSR Projects and such amount shall be spent in Compliance of CSR Policy towards CSR obligation as per their respective implementation schedule.

The terms of reference of CSR Committee have been disclosed in the Report on Corporate Governance and a detailed breakup of expenditure carried out and other details related to CSR activities has been disclosed in the Annual Report on Corporate Social Responsibility is annexed with Boards Report as Annexure-II. The CSR Policy is disclosed on the website of the Bank at https://www.aubank.in/investors/secretarial-policies.

AB. Disclosure under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013

In accordance with the provisions of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, your Bank is committed to provide a safe and conducive work environment to all its employees and associates. The Bank has implemented its Policy on Prevention and Redressal against Sexual Harassment at the work place.

The disclosure required under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 is provided in Report on Corporate Governance annexed with Boards Report as Annexure-I.

AC. Subsidiary, Joint Ventures & Associate Companies

The Bank does not have any subsidiary, joint ventures & associate companies. Hence, the details of this clause are not applicable to the Bank. Accordingly, the Bank is also not required to formulate a specific policy on dealing with material subsidiaries.

AD. Material Orders Passed by Regulators or Courts or Tribunals

During the period under review, no material orders have been passed by the Regulators/ Courts/ Tribunals which would impact the going concern status of the Bank and its future operations.

AE. Internal Financial Control & their Adequacy

Your Bank has an effective internal financial control system in line with the risk appetite of the Bank and aligned to the scale, size, and complexity of its operations. The scope and authority of the risk based internal audit function is defined in the Internal Audit Policy of the Bank which is duly approved by the Board.

The audit function essentially validates the compliances of Banks processes and operations with regulatory guidelines, accounting procedures and Banks own internal rules and guidelines.

The internal audit function provides independent assurance to the Board of Directors and Audit Committee on the quality and effectiveness of the Banks internal control, risk management and governance systems and processes.

Proper internal controls were in place and operating effectively for the period under review. Further, in compliance with the requirements of the Act joint statutory auditors have issued an opinion with respect to the adequacy of the internal controls over financial reporting of the Bank and the operating effectiveness of such controls, details of which may be referred to in the Auditors Report attached to the audited financial statements of FY 2022-23.

AF. Cost Records

Being a Banking company, provisions of Section 148(1) of the Act, relating to maintenance of cost records is not applicable to the Bank.

AG. Corporate Governance

Your Bank believes in promoting transparency, accountability, integrity, fairness and compliance while maintaining adequate risk management and internal controls for sustainable business growth and fostering public confidence.

The Bank consistently evaluates its practices against industry benchmarks to ensure adherence to the best practices of Corporate Governance to achieve and upholding the utmost standards of Corporate Governance. The Bank remains steadfast in its commitment to operate in accordance with the highest principles of governance and ethics, with the aim of maintaining its reputation as a model institution in the banking industry.

The Bank accords paramount importance in having a best-in-class Governance and assurance framework in the Institution. The Bank continuously endeavour to fortify and upgrade its Risk Management, Compliance and Audit practices. The Board of Directors and its various committees, being the apex decision-making bodies of the Bank, oversee the overall Governance & Assurance framework.

As stated above, it is Banks persistent effort to continuously elevate the level of governance & assurance functions and it is pertinent to enumerate some of the present key aspects of these functions in the Bank along with the new practices implemented/initiatives undertaken in the recent past to fortify the risk and compliance culture:

1. Risk Management:

Banks risk management philosophy and approach are designed to protect customers and investors interests along with Banks reputation and financial strength. Execution of core risk management activities in the Bank has been delegated to Board Delegated Committee viz. Credit Risk & NPA Management Committee, Operational Risk Management Committee, Asset Liability Management Committee, IT Steering Committee and IT Security Risk Management Committee.

2. Compliance Function:

The most important role of Compliance function is to ensure a robust compliance culture in the Bank. To set the right tone of Compliance culture, the function seeks regular guidance from the Board of Directors and its various committees. It connects with the internal stakeholders through periodic structured and unstructured meetings to convey the compliance requirements loud and clear.

The Compliance Function in its endeavour to further fortify its efforts has implemented various new initiatives, some of which are (i) Compliance Sustenance Framework, (ii) Compliance Self Certification, (iii) Strengthening the Product Approval Process, (iv) Quality Assurance and Improvement Programme (QAIP), (v) specialised domain knowledge of IT/IS resources roped in.

3. Internal Audit Function:

The Internal Audit Department follows a risk-based audit approach as laid down in the Risk Based Internal Audit Policy of the Bank and prioritises audits of high-risk areas identified in collaboration with the Risk Management as well as Compliance Functions. Further, to strengthen the IAD, Bank has set up an independent Quality Assurance function carries out an independent quality check of the audit activities conducted by the various sub-verticals of the Internal Audit function.

During the year, your Bank was awarded with the Certificate of Excellence on Corporate Governance from The Institute of Company Secretaries of India.

The Report on Corporate Governance for FY 2022-23 along with certificate issued by M/s. V. M. & Associates, Company Secretaries confirming the compliance to applicable requirements related to corporate governance as stipulated under Chapter IV of the SEBI Listing Regulations, is annexed with Boards Report as Annexure-I.

AH. Business Responsibility and Sustainability Report & Sustainability Initiatives

The Bank endeavours to benchmark itself with the best of corporates in India and continued its focus to implement best Environmental, Social and Governance (ESG) practices in its operations with responsible lending approach. In alignment with the vision of the Bank, through its sustainability initiatives, the Bank continue to enhance value creation in society, steer itself towards resilience and sustainable growth.

The Board of Directors has constituted Sustainability Committee and approved the Sustainability Policy of the Bank which serve as guiding principle for driving the Banks sustainability initiatives, thereby ensuring that sustainable practices are consistently, methodically, and strategically integrated into Banking operations.

As a measure of global best practices on sustainable initiatives and ESG practices, Banks First Sustainability Report was released on January 19, 2023 for FY 2021-22 in line with the Global Reporting Initiative framework - Sustainability Reporting Standards (GRI Standards core option).

Further, In accordance with the amendment in Regulation 34(2)(f) of the SEBI Listing Regulations, vide Gazette notification no. SEBI/LAD-NRO/GN/2021/22 dated May 5, 2021, the Business Responsibility and Sustainability Report ("BRSR") is hosted at the Banks website.

The BRSR is annexed with Boards Report as Annexure-V and disclosed on the website of the Bank at https://www.aubank.in/investors.

AI. Particulars of Employee Remuneration

I n accordance with Section 197(12) of the Act read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rule, 2014, the ratio of the remuneration of each Director to the median employees remuneration and other details is annexed with Boards Report as Annexure-III.

The statement containing particulars of employees as required under Section 197(12) of the Act read with Rule 5(2) and Rule 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, as amended, forms part of this report. In terms of Section 136(1) of the Act the annual report is being sent to the Members excluding the aforesaid annexure, the annexure is available for inspection up to the date of AGM at the registered office of the Bank and any Member interested in obtaining a copy of the Annexure may write to the Company Secretary of the Bank at investorrelations@aubank.in.

AJ. Management Discussion and Analysis

In accordance with the Regulation 34(2)(e) and Schedule V of the SEBI Listing Regulations, the Management Discussion and Analysis Report for the FY 2022-23 is covered in a separate section forming part of the Annual Report.

AK. Annual Return

In accordance with the provisions of Section 134(3)(a) read with Section 92(3) of the Act the draft Annual Return for the financial year ended on March 31, 2023 in the prescribed form MGT-7 is disclosed on the website of the Bank at https://www.aubank.in/investors.

AL. Whistle-Blower Policy & Vigil Mechanism

In accordance with the provisions of Section 177(9) of the Act rules made thereunder and Regulation 4(2)(d) and Regulation 22 of the SEBI Listing Regulations, the Bank has implemented Whistle-Blower Policy & Vigil Mechanism which is disclosed on the website of the Bank at https://www.aubank.in/investors/Secretarial- policies.

The details have been provided in Report on Corporate Governance annexed with Boards Report as Annexure-I.

AM. Anti-bribery and Anti-corruption Policy

The Bank follows a zero-tolerance approach towards bribery, corruption, and other wrong practices. The Bank is resolute to act professionally, fairly, ethically and with integrity in its dealings and operations. The Bank has a Board approved Anti-Bribery and Anti-Corruption Policy laying down the principles for carrying out Banking business in an honest and ethical manner. The said policy is disclosed on the website of the Bank at https://www.aubank.in/notice-board.

AN. Compliance of Secretarial Standard issued by the Institute of Company Secretaries of India

The Bank has complied with the Secretarial Standards issued by the Institute of Company Secretaries of India on Meetings of the Board of Directors and General Meetings.

AO. Status of Ind AS Implementation

As per the RBI circular RBI/2015-16/315 DBR.BP.BC.No.76/21.07.001/2015-16 dated February 11, 2016 Implementation of Indian Accounting Standards (Ind AS), The Banks are advised to follow the Indian Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015, subject to any guideline or direction issued by the RBI in this regard. The Banks in India currently prepare their financial statements as per the guidelines issued by the RBI, the Accounting Standards notified under Section 133 of the Act and generally accepted accounting principles in India (Indian GAAP). In January 2016, the Ministry of Corporate Affairs issued the roadmap for implementation of new Indian Accounting Standards (Ind AS), which were based on convergence with the International Financial Reporting Standards (IFRS), for scheduled commercial Banks, insurance companies and non-banking financial companies (NBFCs). In March 2019, RBI deferred the implementation of Ind AS for Banks till further notice as the recommended legislative amendments were under consideration of Government of India. The Bank had undertaken preliminary diagnostic analysis of the GAAP differences between Indian GAAP vis-a-vis Ind AS and shall proceed for ensuring the compliance as per applicable requirements and directions in this regard.

Directors Responsibility Statement

Pursuant to Section 134(3)(c) read with Section 134(5) of the Act the Board of Directors hereby confirm that:

1. In the preparation of the annual accounts for the year ended March 31, 2023, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any.

2. We have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Bank as on March 31, 2023 and of the profit of the Bank for the year ended on that date.

3. We have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the Banks assets and for preventing and detecting fraud and other irregularities.

4. We have prepared the annual accounts on a going concern basis.

5. We have laid down internal financial controls to be followed by the Bank and ensured that such internal financial controls are adequate and were operating effectively.

6. We have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Acknowledgment and Appreciation

The Board places on record its gratitude to the Government of India, various State Governments, RBI, SEBI, MCA, IRDAI, IBA, UIDAI, CERSAI, Bankers, Lenders, Credit Rating Agencies & Debenture Trustees for their continued support and faith reposed in the Bank.

The Board would also like to thank BSE Limited, National Stock Exchange of India Ltd., National Securities Depository Limited, Central Depository Services (India) Limited, Registrar & Share Transfer Agent, Vendors and Service Providers for their continued support & co-operation.

The Board also places on record its appreciation to its valued customers for their continued patronage and to the members & Debenture holders of the Bank.

The Board also expresses its heartfelt thanks and gratitude to each employee and their families for their continued commitment towards the Bank and its customers, who by demonstrating strong work ethics, professionalism, teamwork, and initiatives helped the Bank continue to serve its depositors and customers and reinforce its customer centric image despite the challenging environment.

For and on behalf of the Board of Directors AU SMALL FINANCE BANK LIMITED

Sd/-	Sd/-
Sanjay Agarwal	Uttam Tibrewal
Managing Director & CEO	Whole-Time Director
DIN: 00009526	DIN: 01024940
Date: June 29, 2023	Date: June 29, 2023
Place: Jaipur	Place: Mumbai
CIN: L36911RJ1996PLC011381 Registered Office: 19-A, Dhuleshwar Garden, Ajmer Road, Jaipur - 302 001, Rajasthan, India