au small finance Management discussions
Economic and Industry Overview
Global Economy
The steady global economic recovery at the beginning of 2022 was marred by the Russia-Ukraine conflict, leaving supply chains in disarray, and pushing inflation to multi-decadal highs with elevated commodity and energy prices. Further, Chinas stringent Zero COVID policy only aggravated the situation. This led to aggressive rate hikes by major central banks, which not only weighed on growth but also stoked fears of a recession in some developed countries.
Moreover, the collapse of Silicon Valley Bank (SVB), Signature Bank and First Republic Bank in the US, and the Swiss regulator-led takeover of Credit Suisse by UBS fuelled fears of a global banking contagion. However, as it stands today, the sector seems to have stabilised.
A milder winter in Europe and an earlier-than-expected reopening in China improved economic prospects in the fourth quarter of 2022. In fact, growth remained better than expected as the US, the Eurozone, and the economies of other countries, began to show indications of recovery in the third quarter, though inflation is decelerating at a slower-than- anticipated pace.
Global inflation in CY2022 stayed at 8.5%, while real GDP growth slowed from 6.5% in CY2021 to 3.3% in CY2022. The International
Monetary Fund (IMF) estimates the world economic growth to bottom out at 2.8% in 2023, and pick up to 3.0% in 2024, led by Asia, especially India and China. Further, the IMF expects global inflation to moderate to 6.6% in 2023 and further to 4.3% in 2024.
Global GDP Growth Trend
| 2022 (%) | 2023E(%) | 2024E (%) | |
| World Output | 3.4 | 2.8 | 3.0 |
| Advanced Economies | 2.7 | 1.3 | 1.4 |
| Emerging Economies | 4.0 | 3.9 | 4.2 |
Indian Economy
Despite the several global headwinds, India remained a bright spot. However, inflation remained persistent and was above the upper band of the RBI target range. The RBI also adopted a hawkish stance and raised rates by 250 bps during FY 2022-23 to 6.5%. However, it signalled a pause in the rates during the Monetary Policy Committee (MPC) meeting held in April, as inflation in India started abating. In fact, inflation stayed in the RBIs target range in March and April 2023, with the Consumer Price Index (CPI)-based inflation falling to 4.7%, the lowest-ever since October 2021.
The Indian economy exceeded all expectations and grew at 7.2% in FY 2022-23. During the year, the index of industrial production (IIP) grew 5.1%, impressive, on the back of the 11.4% growth in FY 2021-22. During the reporting period, the manufacturing sector grew 4.5% YoY, electricity grew 8.9% YoY and mining grew 5.8% YoY. Most high-frequency indicators remained robust. Gross GST (Goods and Services Tax) came in at H18.10 lakh crore, with gross monthly collections averaging H1.51 lakh crore, up 22% YoY.
Outlook
Although headwinds have pushed most multilateral agencies such as the IMF to lower their GDP growth expectations for India, the projected numbers remain in the range of 5.9-6.5%, higher than that of any major economy in the world. This is the result of multiple tailwinds like the Government impetus on capital expenditure (budgetary allocation of ?10 trillion), schemes such as PLI and PM Gati Shakti, credit guarantee programme for SMEs, robust private expenditure and strong corporate balance sheets.
Indian Banking Industry
While global banking was staring at a crisis, the Indian banking sector demonstrated strength and resilience in FY 2022-23. Incremental credit stood at H17.83 lakh crore and incremental deposits stood at H15.78 lakh crore. As a result, the incremental credit- deposit ratio was at a 15-year high of 113%. Credit growth for the year was at 15%. Going ahead, the growth momentum is expected to remain strong supported by moderate inflation and some easing in the liquidity conditions. However, deterioration in global macro and geopolitical situation remain key risks.
Small Finance Banks (SFBs)
SFBs were created with an objective to extend financial services to the informal segment of the society and support financial inclusion at grass root level. SFBs still form a small part of the banking sector with little over 1% market share in advances and deposits. As of March 2022. SFBs, albeit on a smaller base, have outperformed commercial banks in deposit and advances growth.
| (H crore) | |||||
| March 2018 | March 2019 | March 2020 | March 2021 | March 2022 | |
| Deposits | 26,470 | 55,687 | 82,488 | 1,09,472 | 1,44,138 |
| Advances | 46,774 | 69,827 | 90,576 | 1,08,613 | 1,34,693 |
| Source: CareEdge |
Loans and Advances
As most SFBs transitioned from being NBFC/MFI (micro-finance institutions), the share of unsecured loans declined from 41% of advances as on March 31, 2018, to 33% as on March 31, 2022, and the share of secured loans (as a % of total advances) increased from 44% as on March 31, 2018, to 56% as on March 31, 2022, as per the CareEdge Ratings report. Gradually, SFBs have diversified into MSME loans, affordable housing finance, gold loans as well as vehicle loans. remains low at approximately 9%-10% of the overall credit outstanding. Further, there are ~7 crore MSMEs in India, contributing ~30% to the countrys GDP and ~48% to total exports. Credit growth to the MSME sector has been at over 30.6% on average during January-November 2022, supported by the extended Emergency Credit Linked Guarantee Scheme (ECLGS).
A recent CIBIL report (ECLGS Insights, August 2022) showed that 83% of the borrowers under ECLGS were micro-enterprises.
Asset Quality
The asset quality of MFIs was impacted during the pandemic, mainly due to exposure to a relatively weaker borrower segment. SFBs with more exposure to unsecured credit were severely impacted. Situation is expected to have much improved in FY 2022-23 basis the initial data that is available.
Opportunity
The SFB opportunity will be largely supported by the rural segment, the presence of informal credit channels, geographic diversification, loan recovery mechanism, the ability to manage local stakeholders, access to low- cost funds and significant crossselling opportunities. India offers a vast opportunity landscape for SFBs catering to the informal economy. Despite its larger contribution to GDP of 47%, the rural segments share in credit
Our Business Overview
FY 2022-23 was a challenging year for business planning with uncertainty around inflation, liquidity, and interest rates. This complex macro environment was balanced by a strong credit demand and robust asset quality. Despite the challenging environment, the operating matrices of the bank continue to be very strong.
Key Activities
To build a Bank that sustains forever, our foundation mindset needs to go beyond stability and growth. It requires us to be more proactive and have a forward thinking and innovative approach. In pursuit of this objective, the Bank initiated various steps during FY 2022-23 and some of the key accomplishments / initiatives are described in this section.
Board Expansion
To build a forever bank, focus on enhanced governance, diversity and inclusion remains our priority. During the year, we appointed three Independent Directors: Mr. Kamlesh Vikamsey, Ms. Malini Thadani, and Ms. Kavita Venugopal. With this, we expanded our Board to a total of 10 directors, including eight independent directors, two of whom are women. This step significantly strengthens our banks governance framework, fostering a robust and inclusive approach.
Reappointment of Chairman, MD & CEO, and ED
In FY 2022-23, the regulator approved the re-appointment of the Chairman, Mr. R. V. Verma for his residual tenure till January 2024 and that of MD and CEO, Mr. Sanjay Agarwal and ED, Mr. Uttam Tibrewal for the period of three years, as was recommended by the Board. This reappointment reinforces that we are heading on the right path with strong compliances, governance and sustainability practices.
Capital Raised
A healthy capital structure is a key requirement for a sustainable and a forever bank. With this objective, we raised growth capital of ?2,500 crore with a mix of ?2,000 crore of Tier 1 equity capital and ?500 crore via Tier-ll bonds during the year. This capital raise helped us achieve a Capital Adequacy Ratio of 23.6% as of March 2023, as against regulatory requirement of 15%.
Authorised Dealer Category-1 License
The Bank has received the coveted Authorised Dealer Category - I (AD Cat I) license in April 2023 from RBI. This will allow us to deal in foreign exchange and offer cross-border trade and services positioning us well to offer a complete suite of products to our customers.
We are diligently working on the logistics associated with launching AD-I related offerings and anticipate their introduction within the current year.
Rating Upgrade
We recognise the paramount importance of earning the trust and confidence of all stakeholders in fostering a sustainable bank. During the year, the credit ratings of the Bank were upgraded to AA/Stable by leading credit rating agencies: CRISIL, CARE and India Ratings. This credit rating upgrade serves as a testament to the banks credibility and resilience. It reinforces our commitment to maintaining a strong and trustworthy position in the market.
Asset Quality
Building a sustainable business model for any lending institution, requires that asset quality be accorded the top most priority.
At AU SFB, credit underwriting, collections and strong asset quality have been key pillar of strength throughout our history. Our asset classification process is fully automated. Our NPA recognition has been happening automatically from the system on a daily basis and in last couple of years, this system has been tested and audited to maintain highest levels of system integrity. As of March 2023, our Gross Non-Performing Assets (GNPA) ratio stands at 1.66%, which is among the lowest in the banking industry. Additionally, our Net Non-Performing Assets (NNPA) ratio is 0.42% as of the same period. These figures highlight our unwavering commitment to sound asset management practices.
Technology-led Ecosystem
In the current global digital landscape, staying abreast of the latest technology and implementing robust cybersecurity measures is imperative for a banks efficiency, success and even survival. As a tech led bank our key focus remains on digitisation, automation and cybersecurity.
One of our key priorities is to build strong digital customerfacing applications. During the year, we continue to make proactive investments to refresh our tech stack, infrastructure, and cybersecurity. We continue to implement best practices and new solutions to keep our cybersecurity measures robust and up to date.
Core Banking System Upgrade
During the year, we upgraded our core banking system to the latest version and became the first bank to be live on the latest Oracle Flexcube version (11.10). With this upgrade, our CBS has the latest technology stack and a future ready architecture to power our aspirations of serving delight to the ever-increasing base of crore of customers.
Data Warehouse and Analytical Workbench
We are leveraging data and analytics to further strengthen our unsecured lending capabilities - building a cloud data warehouse platform and setting up a dedicated analytics team are steps that we have taken in this direction.
Robotic Process Automation
We are adopting robotics to bring efficiency into the system and cut down on manual interventions which can be avoided by using technology. We have automated 165 processes till date using RPA (Robotic Process Automation) and have taken up the exercise of identifying bank wide processes which can be automated with increased focus and commitment.
Digital Current Account
During the year, we enabled Digital Current Account opening through Video Banking VKYC process and we are dedicated to further expand the suite of Digital Video Banking Services. We strongly believe that Video Banking holds the potential to replace branches for most of the use cases that do not involve cash and our strategic focus is to further strengthen the proposition as, together, our AU0101 app and Video Banking offer complete digital banking suite.
BBPS on Video Banking
Our Bank has become the countrys first commercial bank to connect with the Bharat Bill Payment System (BBPS) and deliver bill payment services via video banking. The fundamental goal of this effort is to increase digital accessibility and economic capabilities, which will lead to greater financial inclusion.
Merchant App
We are working on launching a Merchant App which is an all-in-one SME banking solution that offers account services (current, savings, loans, and deposits), QR collections, single and bulk payments, tax payments, digital marketplace, basic to advanced invoicing, accounting services, and much more.
Automation and Efficiency
To remain competitive and sustainable in the rapidly evolving world, automation plays a crucial role in enhancing productivity, efficiency and accuracy. During the year, we have been working with leading technology service providers such as Salesforce to implement cutting edge solutions. To improve efficiency, we are focused on leveraging robotics (RPA) and working with FICO to implement their leading enterprise Business Rule Engine solution to automate credit decisioning.
HR Initiatives
The presence of a dedicated and motivated team is a crucial factor for the long term success of any sustainable financial institution. We are developing a highly empowered and capable team with an entrepreneurial work culture to drive the bank. Over the last few years, we have implemented various industry first HR initiatives which have garnered market recognition like Menstrual leave policy, Sabbatical policy, AU Forever Pass, Leave Bank etc.
Physical Expansion
Having geographical diversity and a wide presence are vital factors for a bank to achieve long term success and sustainability. Over the last few years, we have been steadily expanding our footprint across the country and currently operate in 21 states and 3 Union Territories. Our future plans involve further expansion nationwide, with a special focus on garnering liabilities from urban centres and generating assets from rural and semi-urban centres. This strategic approach will contribute to our continued growth and balanced regional coverage.
AU Ivy
With an attempt to redefine the premium banking segment, AU SFB has launched its new super premium banking programme -AU Ivy. AU Ivy is currently offered very selectively by invitation only to creme-de-la- creme ultra-HNI customers. AU ivy programme offers a nocharge promise to the customers on various banking products & services along with some unparalleled privileges beyond banking. The programme is complemented with an exclusive AU Ivy debit card offering, a specially designed metal debit card that is a first on the VISA Infinite platform for the bank.
Sustainability
Sustainability is an inseparable part of our banks strategy and as an overarching goal, our efforts are circled around building a sustainable future for our planet through responsible business practices. Our initiatives to reduce carbon footprint through optimisation in consumption, carbon emission and proactive ways to reduce, reuse, recycle waste, are some of the important activities and initiatives that will help us in achieving our goal. During the year, we released our first Sustainability Report and have formed a Sustainability Committee led by industry veteran Ms. Malini Thadani.
Securitisation
The efficient use of capital is a fundamental pillar in a banks journey towards sustainability. Securitisation serves as an effective tool to churn assets on the portfolio and reach out to an increasing number of borrowers to help them achieve their dreams. During the year, we securitised assets worth approximately H5,000 crore, strategically leveraging our capital to its potential. This approach ensures optimal capital utilisation and supports our commitment to sustainable growth.
Bancassurance
Establishing strategic partnerships and ensuring comprehensive product accessibility are crucial for a banks success. With this objective, we partnered with ICICI Lombard General Insurance and HDFC Life during the year for bancassurance tie-ups to provide our diverse customers access to a range of insurance products.
AU Insights
Ensuring transparency is a crucial aspect of establishing a lasting and sustainable banking institution. With this principle in mind, we have created the AU Insights forum, where the leaders of our Strategic Business Units (SBUs) share their ideas and strategies. The presentations delivered by our nine SBUs are available on the AU SFB website (aubank.in/investors/ au-insights) and provide valuable insights into the unique offerings of each SBU, enabling a deeper comprehension.
Rural Banking
With 65% of the Indian population residing in the rural areas of the country, expanding the outreach beyond the cities is paramount to achieving financial inclusion. The very formation of Small Finance Banks (SFB) was coined to cater to the unserved section of society who otherwise were left at the mercy of moneylenders. With a 31% presence in unbanked rural centres (URC) and ~94% achievement towards lending to the priority sector, we are committed to reversing the scenario and nurturing the development of the hinterlands of India. Additionally, we are working towards growing our engagement with Small and Marginal Farmers (SMF) and as a first step, we have initiated funding to Farmer Producers Organisations (FPOs).
Customer Centricity
The satisfaction and happiness of customers are essential prerequisites for any successful institution. This holds even greater significance for a long- lasting bank, where the trust of our customers is an absolute requirement. Our purpose of existence is defined by our customers, and we strongly believe in nurturing trustworthy and enduring relationships with them.
We ensure that our customers experience delight through various means. Firstly, we interact with them with the right attitude and extensive knowledge, ensuring that their needs are met effectively. Our services are executed exceptionally, aiming to exceed their expectations. Moreover, we maintain open lines of communication, actively seeking their honest feedback, which helps us improve and grow.
To foster a deeper connection with our customers, we are committed to enhancing the quality of our workforce, ensuring that we hire the best talent. Additionally, we actively engage with our customers through various programmes and initiatives, enabling their active participation and involvement.
Unsecured Lending
Having a comprehensive range of products is an essential necessity for a bank to thrive in the long term. Keeping this in mind, we have expanded our unsecured lending offering this year - by expanding digital personal loans proposition and initiating business loans to small merchants basis their transaction data on our banks QR. We have disbursed H800 crore in Personal Loans and H200 crore in UPI QR transactions- based lending so far.
RBI Innovation Hub
As part of the PM Street Vendors AtmaNirbhar Nidhi (PM SVANidhi) scheme, we have partnered with the Reserve Bank Innovation Hub during the year to offer digital loans to women street vendors across India.
Floating to Fixed Rate Loans
To align with the cost of funds which is largely floating in nature, our bank is focussing on building more floating rate assets. The proportion of floating rate loans has increased from 26% in FY 2021-22 to 34% in FY 2022-23.
Your Bank displayed a good performance despite a challenging economic environment, and we are proud of the achievements we have recorded over the past year. We successfully executed our strategic priorities, delivered strong financial results, and continued to enhance our customer experience. In FY 2022-23, we:
• Raised growth capital of H2,500 crore with a mix of H2,000 crore of Tier-I equity capital and H500 crore of Tier-II bonds
• Deposits book grew by 32% YoY to H69,365 crore along with greater granularity. CASA ratio stood at 38.4% as of March 31, 2023 (vs 37.3% as of March 31, 2022)
• Gross advances increased by 26% to H59,158 crore; Securitised book stands at H4,914 crore
• Bank delivered profitability growth by 26% YoY at H1,428 crore; RoA at 1.8% and RoE at 15.4%
• Asset quality improved with GNPA at 1.66% (vs 1.98% in
FY 2021-22); Net NPA at 0.42% (vs 0.50% in FY 2021-22)
• Full-year cost of funds maintained at 5.96%
(vs 5.95% in FY 2021-22)
• CD ratio improved to 84%
(vs 88% in FY 2021-22)
| Profit and Loss Account | (H crore) | |
| Particulars | FY 2022-23 | FY 2021-22 |
| Net Interest Income | 4,425 | 3,234 |
| Other Income | 1,034 | 994 |
| Net Total Income | 5,459 | 4,228 |
| Employee Cost | 1,793 | 1,379 |
| Other Operating Expenses | 1,647 | 1,034 |
| Operating expenditure | 3,440 | 2,413 |
| Operating Profit | 2,019 | 1,815 |
| Net Provisions and Contingencies | 155 | 361 |
| PBT | 1,865 | 1,454 |
| Provision for Tax | 437 | 324 |
| PAT | 1,428 | 1,130 |
| Non-Interest Income | (H crore) | |
| Particulars | FY 2022-23 | FY 2021-22 |
| Loan Assets Processing and Other Fees | 637 | 425 |
| General Banking, Cross-sell and Deposit-related Fees | 210 | 152 |
| PSLC Fees | 56 | 225 |
| Credit Card-related Fees and Charges | 112 | 20 |
| Miscellaneous | 64 | 29 |
| Core Other income | 1,079 | 851 |
| Income from Treasury Operations | (44) | 143 |
| Total Other Income | 1,034 | 994 |
Earnings
Our total income increased by 34% to H9,240 crore in FY 2022-23 from H6,915 crore in FY 2021-22, driven by 39% growth in interest income and 27% growth in other core income. Our net interest income increased by 37% to H4,425 crore in FY 2022-23, from H3,234 crore in FY 2021-22, driven by a healthy gross advances growth of 26% and stable cost of funds.
Operational Expense
Our cost-to-income ratio increased to 63% in FY 2022-23 from 57.1% in FY 2021-22. This was primarily due to investment in our digital franchise, building digital capabilities for the future (credit card, merchant solutions, video banking), expanding distribution and branch franchise, and investing in brand building.
In FY 2022-23, the bank invested ~H506 crore towards these areas.
Profitability
Profit After Tax (PAT) grew by 26% to H1,428 crore in FY 2022-23 from H1,130 crore in FY 2021-22, driven by consistent growth, stable costs and improving asset quality.
Our Bank delivered an RoA of 1.8% for FY 2022-23, as against 1.9% in the previous year. In terms of RoE, the bank delivered 15.4% for FY 2022-23, as against 16.4% in FY 2021-22. The marginal fall in RoA and RoE is indicative of the shift in the asset mix towards home loans and commercial banking-related assets.
Net Interest Margin
Despite a 250bps increase in the domestic Repo rates, our Net Interest Margin (NIM) for the FY 2022-23 remained stable at 6.1% (same as FY 2021-22) supported by factors like equity capital raise, just 1 bps increase in full year cost of funds and leveraging securitisation to raise long term funding.
The full-year NIM has been normalised to include impact of off book assets in the Interest earning assets for more accurate representation.
| Balance Sheet | (H crore) | |
| Particulars | FY 2022-23 | |
| FY 2021-22 | ||
| Liabilities | ||
| Capital and Reserves | 10,977 | 7,514 |
| Deposits | 69,365 | 52,585 |
| Borrowings | 6,299 | 5,991 |
| Other Liabilities and Provisions | 3,575 | 2,988 |
| Total liabilities | 90,216 | 69,078 |
| Assets | ||
| Cash and Bank Balances | 9,425 | 5,929 |
| Investments | 20,072 | 15,307 |
| Advances | 58,422 | 46,095 |
| Fixed Assets | 740 | 623 |
| Other Assets | 1,557 | 1,125 |
| Total Assets | 90,216 | 69,078 |
Deposits
Our deposits base grew by 32%
YoY and stood at H69,365 crore as on March 31, 2023 with improving granularity. We continue to focus on quality over quantity, and the result is reflected in the contribution of retail deposits (CASA + retail TDs), which increased to 69% of deposits from 67% YoY.
FY 2022-23 was a year of rising interest rates where the Central Bank increased the repo rate by 250 bps. Despite this increase in rates, the full-year cost of funds stood at 5.96% (against 5.95% in FY 2021-22).
Capital Raise and Capital Adequacy
Your Bank raised growth capital of H2,500 crore during FY 2022-23, of which Tier-I equity capital is H2,000 crore and H500 crore was Tier-II bonds. With this capital raise, the total net worth of the Bank stands at H10,977 crore as of March 31, 2023.
Our capital adequacy ratio improved to 23.6% as of March 31, 2023 from 21.0% as of March 31, 2022. The Tier-I ratio also improved to 21.8% as of March 31, 2023 from 19.7% as of March 31, 2022.
Liquidity
We prudently managed liquidity. The average LCR in FY 2022-23 was at 127% (vs regulatory requirement of 100%). We also hold additional liquidity, which is invested in highly rated corporate bonds.
Distribution
In FY 2022-23, we expanded distribution and opened 69 new liability branches taking the total branch count to 474, and entered newer states. Our touchpoints increased by 108 during the year to 1,027. Further, we were able to acquire 1.9 lakh+ savings account customers through the video banking channel in the year.
Priority Sector Lending
Informal lending at higher interest rates is still a prevalent practice due to the lack of formal banking services for a significant portion of the population. Financial inclusion has always been the governments priority, therefore, Priority Sector Lending (PSL) is considered the most popular and efficient channel for disseminating formal credit to overlooked sections of society.
PSL includes loans to farmers, agriculture and allied activities, food processing, MSME, housing, social infrastructure, education, and loans to certain weaker sections, with a minimum threshold being mandatory in certain PSL categories. To achieve financial inclusion and ascertain formal credit flow to the bottom of the population pyramid, SFBs have been entrusted to extend at least 75% of their advances to PSL.
While PSL is a regulatory requirement, your Bank has taken the opportunity to achieve PSL targets and fulfil the credit requirements of the unbanked and underserved with our strong foothold in rural and semi-urban areas, and product offerings that meet the need of the rural population and micro-entrepreneurs.
Our inherent model helps to generate PSL advances. We are delighted to inform you that AU SFB has been able to achieve the regulatory PSL requirements YoY, and in FY 2022-23 too we exceeded the advances target and achieved 94%, against the mandatory requirement of 75%.
Small ticket-size loans in unbanked locations pose an inherent credit risk. With the extensive insight gained from lending to various micro and small businesses over the years, we have been able to create and deliver the right product offerings, while mitigating the risks, and concurrently achieving the PSL target.
AU SFB has also been instrumental in helping micro-entrepreneurs get back on their feet after the pandemic, with seamless and quick delivery of services and products at affordable price points. We continue our endeavour to meet the financial needs of the underserved, cater to their credit requirements, and partner with them in their growth, responsibly and sustainably on our Forever journey.
Total Loans and Advances
| FY 2022-23 | FY 2021-22 | |||
| Gross Advances | Assigned Loans | Gross Advances | Assigned Loans | |
| Wheels | 19,023 | 3,859 | 16,438 | 912 |
| SBL-MSME | 18,535 | 1,040 | 16,313 | 274 |
| Home Loan | 4,283 | 2,655 | ||
| Commercial Banking | 12,759 | 3 | 7,986 | 4 |
| Business Banking | 4,969 | 2,900 | ||
| Agri | 3,998 | 2,259 | ||
| NBFC | 2,551 | 2,036 | ||
| REG | 1,240 | 3 | 791 | 4 |
| Credit Card | 1,468 | 409 | ||
| Personal Loan | 642 | 331 | ||
| Others | 2,200 | 2,293 | ||
| SME* | 248 | 11 | 363 | 15 |
| Total | 59,158 | 4,914 | 46,789 | 1,206 |
Asset Growth
Gross advances for FY 2022-23 grew 26% YoY to H59,158 crore, driven by growth in all key segments. The Net advances for the same period was at H58,422 crore. Notably, during
the year, the Bank also securitised H4,943 crore of loan portfolio mostly comprising of Wheels and SBL loans. Please note that for the business analysis of each of the SBUs and in the entire MD&A section, for accurate representation purposes, we
shall be using the Loan Portfolio as the loan matrix instead of Gross Advances.
Loan Portfolio = Gross Advances + Assigned/ Securitsed loans
Provisioning and Contingency
| Particulars | FY 2022-23 | |||
| No. of Loans | Loan Amount | Provisions | Coverage | |
| GNPA | 45,904 | 981 | 695 | 71% |
| COVID-related restructuring (Standard) | 8,539 | 700 | 116 | 17% |
| Contingency provisions | 90 | |||
| Floating provisions | 41 | |||
| Stressed and contingencies provisions | 1,681 | 942 | ||
| Provisions towards Standard Assets | 191 | |||
| Total Provisions | 1,133 | |||
| Provisions as a % of gross advances | 1.91% | |||
| Particulars | FY 2022-23 | FY 2021-22 | ||
| Gross NPA (H crore) | 981 | 924 | ||
| Gross NPA % | 1.66% | 1.98% | ||
| Net NPA (H crore) | 245 | 231 | ||
| Net NPA % | 0.42% | 0.50% |
Asset Quality Performance
Gross NPA and Net NPA stood at 1.66% and 0.42%, respectively, as of March 31, 2023 as compared to 1.98% and 0.50%, as of March 31, 2022. The continued improvement in asset quality is mainly driven by an increased proportion of home loan and commercial banking assets; and the secured and small-ticket nature of our asset book.
In FY 2021-22, AU SFB moved to a more conservative provisioning policy. Provision Coverage Ratio (PCR) stood at 75% (78% incl. technical w/off) as on March 31, 2023, as compared to 75% (77% incl. technical w/ off) as on March 31, 2022.
Besides provision on standard assets, we were carrying 17% provisioning against restructured loans, an additional H90 crore of contingency provisions and H41 crore of floating provisions. Total provisions, including standard assets as % of gross advances, stood at 1.91% as of March 31, 2023.
Business Performance and Highlights
Q Branch Banking
In our journey of building your Bank, it was clear to us early on that we needed to invest in establishing our retail liabilities franchise as it would give us a long-term sticky customer base to whom we can offer our complete suite of banking products and build sustainable long-term relationships. Towards this, we reorganised our liabilities business into Branch Banking, Cooperative Banks and FIG, Government Business and Wholesale Liabilities Segments.
Branch Banking has focused on building the GIST (Granular, Individual and Small Business, Transacting) customer base to raise low-cost, stable, retail deposits. Since March 2020, our total deposit book has grown 2.7x, to reach H69,365 crore as of March 2023.
We continue to focus on building a base of GIST customers, which furthers our objective of building a predictable, scalable, sustainable, and replicable Branch Banking franchise.
The GIST framework is powered by onboarding high-quality retail customers from Urban Markets, and by following the AATD (Acquire, Activate, Transact and Deepen) framework. We deepen our engagement with them by bringing them the optimal mix of a comprehensive bouquet of products and solutions, and prompt personalised and high- quality customer service backed
Distribution
In the urban markets in the country, top 136 centres have 65% of the total deposits in the country.
With our urban market branches thriving in the existing and new geographies of UP, South and East India, we now have a pan-India presence across all the key states (21) and UTs (3) of the country.
We have a segmental approach for Current Account, Non-Resident, Government Business, TASC and Enterprise Salary segments. This strategy has helped us build a sizeable portfolio of customers in these segments. In FY 2021-22, we added a dedicated Ivy RM Channel (Key Account Manager, now renamed Ivy Relationship Manager) with specialised bankers to cater to HNI customers. The CA, NR, TASC, ES and Ivy channels now contribute H7,000+ crore to the overall liabilities business. We continue to build these channels to broadbase our liabilities further.
Channel Performance
| Channel | FY 2022-23 Book (in crore) | FY 2021-22 Book (in crore) | Growth |
| NR Book | 2,227 | 991 | 2.2x |
| TASC Book | 2,921 | 2,665 | 10% |
| KAM Book | 1,855 | 1,300 | 1.4x |
| Enterprise Salary (salary credit) | 166 | 105 | 1.6x |
Payment Channels
We are emerging as an important throughway in the financial network of the country with 23.7 lakh+ savings accounts, 5 lakh+ Credit Cards, 10 lakh+ QR codes and 48 thousand+ FASTags. The network effects are strengthening our presence with customers known and unknown in a subtle way. Every transaction that passes through our network only embeds us into the financial network of the country deeper.
Focus on Small Businesses
With the increasing formalisation and digitisation, many small businesses are getting into mainstream banking. With our expertise in small business credit, best-in-class products (Royale Business, Platinum Business) and our capability to provide tailor-made solutions, we are emerging as the natural choice for small businesses. To cater to their varied needs, we offer a wide range of products, including credit offerings (SBL and Business Banking), transaction banking services (CMS, QR and UPI, API-based transactions) and complete family banking solutions (Royale and Platinum programme with wealth and insurance offerings).
This year, several new initiatives were rolled out to further strengthen our offerings for small businesses. We launched a completely digital current account journey, which is DIY enabled, as well as our QR-based lending product, DL OD. With the impending operationalisation of our trade offering through the AD-1 License and the launch of our merchant app, we are positioned as a one-stop-shop for all the banking needs—business or personal—of small merchants.
We are pleased to report that our efforts to be a complete banking partner for small businesses are bearing fruit, as 37% of our small business customers also have a deposit relationship with us.
Positioned to be Future Ready
We will continue to acquire low-cost GIST customers and focus on building a granular CA book. Hassle-free banking continues to be our cardinal principle, and we are introducing a single dial-in contact number for our customers to engage with us for all banking solutions. We leverage data analytics to gain valuable insights that help us make informed decisions in retail asset-led liability acquisition.
In our endeavour to meet Generational Banking needs, we have started positioning ourselves as the Bank of Choice for our customers. We aim to achieve this by providing exceptional personalised customer services, offering need-based products, customised solutions, making banking easy, providing value-added services that go beyond traditional banking such as financial/ investment planning, and fostering a culture of innovation.
Q Wheels
Overview
Vehicle loan, with a vintage of 28 years, has been an important pillar among assets and is the most seasoned book in our portfolio. Vehicle loans have witnessed various cycles of highs and lows in the automobile sector, but with our deep expertise and experience, our vehicle loan portfolio has grown steadily and forms 36% of our total loan portfolio, as of the end of FY 2022-23.
We extend credit for a wide range of product offerings, and it is extended to customers looking to buy anything from 2-wheeler to 22-wheelers for personal or commercial usage. We offer loans
for new and pre-owned vehicles across several categories including Cars, Multi-Utility Vehicles (MUVs), Sports Utility Vehicles (SUVs),
Light Commercial Vehicles (LCVs), Medium and Heavy Commercial Vehicles (MHCVs), Construction Equipment (CE), tractors, 2- and 3-wheelers.
In the commercial space, we serve First Time Buyers (FTBs), First- Time Users (FTUs), Small Road Transport Operators (SRTOs) and captive users. In the personal segment, we serve Salaried, Self-Employed Professionals (SEP), Self Employed Non-professionals (SENP), agri and dairy farmers, etc. The average loan tenure is of -3.5 years in our book and is also secured through the hypothecation of the vehicle.
During the year, we took several initiatives on the product side that helped us stay ahead of the curve:
• Maintained a multi-product strategy to cater to varied customer segments as well as maintaining asset quality
• Used vehicles remained our key focus area with a large opportunity base and increase in formalisation of the used market in the last few years
• Customer-friendly business practices were adopted such as Digital Welcome Video and Letter, and continuous efforts were made towards grievance resolution
• Established a dedicated CV team focusing on market opportunity and aiding to yield requirement
• Gained operating rhythm in new geographies
• EV push: Employee-friendly financing policy launched
Wheels SBU draws inspiration from the strong India story. With the countrys aim to double its auto industry size to H15 lakh crore by the end of 2024, vehicle finance is expected to reap benefits. With vehicle penetration still on the lower side, demand is expected to remain robust in the upcoming year. The Wheels SBU is aligned and aptly positioned to leverage these benefits.
^ Secured Business Loans
Overview
Secured Business Loan (SBL) is a flagship product within the retail assets segment. Our loans primarily serve MSMEs with a few years of track record in such businesses, generating cash flows at high frequency, with limited formal documentation (such as grocery/kirana stores, dairy/cattle rearing and hotel/ restaurants). We are focused on the financing of consumer-driven unserved and underserved MSME businesses. We understand our customers business and their future requirements, their existing and projected cash flow, and on-ground feedback to arrive at the loan amount that can be offered to them. Such loans are backed-up by business cash flows, and are for working capital and business expansion. Further, as these loans are secured in nature, we take physical collateral as a deterrent to loan, which also helps in steady behaviour of repayment along with cash flows.
Our funding is to different businesses and different participants in the supply chain which further helps in creating employment opportunities.
Along with the unserved and underserved segments of the economy, we also serve to the formal segment, that have more structured businesses. Our target customer base includes traders, wholesalers, distributors, retailers, manufacturers and self-employed professionals, and these loans are meant to meet their needs for expansion, working capital and purchase of equipment. The average loan tenure is 8-10 years.
There is a huge addressable credit gap in the MSME sector and a majority of the demand is from MSMEs located in rural and semi-urban geographies. As per a report by UK Sinha Committee constituted by RBI in June 2019, the MSME credit gap is estimated to be around H20-25 trillion.
At AU SFB, our focus is to bring more micro-enterprises into the fold of formalised credit, and we have emerged as one of the prominent bankers to MSMEs in the last decade in North, Central and Western India.
Out of the total 6.3 crore MSMEs, 74% are based in 10 States and AU SFB has good penetration in four of these States, namely Rajasthan, Madhya Pradesh, Maharashtra, and Gujarat.
Moreover, we are present in 9 States and 1 Union territory with a network of 440+ branches.
Source: MSME Annual Report 2022-23
With rising numbers of MSMEs and rapid formalisation in the sector, the size of the pie will keep expanding. AU SFB has been serving these segments for the last 28 years, and SBL has been in this business for 13+ years and has built a sustainable business model to serve the majority of customers in rural and semi-urban areas. We are well-poised to move deeper in our existing markets and to venture into new geographies.
After the disruption caused by the pandemic, FY 2022-23 turned out to be a good year for the economy.
A majority of the MSME businesses recovered from the havoc, with some of them being in recovery phase.
During the year, RBI hiked the repo rates multiple times to contain the rising inflation. This took some toll on the overall credit demand in the economy as lenders increased the rate of interest on all forms of loans.
However, overall credit offtake in FY 2022-23 remained strong compared to the last couple of years. The service sector registered a remarkable comeback after the long hiatus caused by the pandemic. The hospitality industry, in particular, showed the best resurgence in recent times as there was a huge demand for hotels, resorts, restaurants, etc. throughout the year. Credit enquiries from schools and coaching centres also made a strong comeback during the year. Essential goods businesses had already reverted to normal and have performed well throughout the year.
^^PerformanceRevie^^^
• As one of the strongest pillars of AU SFB, the SBL business is one of our key focus areas. Despite the challenging macro environment during the year, SBL business registered an 18% growth.
• Demand for loans has been quite strong of late, despite the headwinds caused by repo rate hikes and the challenging global environment. We see a strong demand for credit in coming quarters, and being a tech-led bank, we intend to explore all the channels within the bank including digital channels. The focus continues to be on customer experience and value proposition.
• Our strong asset quality gives us the confidence to venture into unexplored territories and serve an increasing number of underserved and unserved MSME businesses.
The upcoming year seems to be promising, from deepening our reach in existing geographies and venturing into new locations.
Q Housing Overview
Indias housing market has recovered from a prolonged slowdown between 2013-2020, with housing sales picking up momentum since the pandemic. Based on various market estimates, Indias home loan market is poised to double by FY 2027-28, with 15-16% CAGR from the current H26 trillion, which is around 29.9% of overall retail credit on the back of secular trends around improving affordability, rising urbanisation and penetration beyond Tier-I locations. Indias urban mortgage penetration (~0.14 home loans per household) remains significantly low. While demand continues to remain high, affordability and the pace of urbanisation are key factors that drive housing purchase decisions. The governments impetus (under the broad umbrella of Housing for All) has also been a key catalyst. The government has been trying to create a favourable ecosystem for homebuyers by rolling out measures such as the allocation to the Pradhan Mantri Awaas Yojana (PMAY) in the Union Budget was enhanced by 66% to over H79,000 crore in FY 2023-24, from H48,000 crore in FY 2022-23.
We provide a comprehensive range of home loan products to meet every home buyers needs (selfconstruction, purchase of flat/ house, extension/renovation, and takeover/top-up), with a focus on the affordable housing segment.
We offer loans from H2 lakh to H500 lakh for a maximum 30-year tenure for salaried customers, and 20 years for self-employed customers. With an average ticket size of H10.2 lakh, we are focused on catering to Tier-2, Tier-3, and Tier-4 cities, where we target salaried as well as business- class customers. Our tailor-made product suite, doorstep services, acceptability of a wider range of properties and income profiles, minimal documentation, in-depth knowledge of target segments and wider geographical presence, bank platform and an approach to educate and serve the needs of the customers are our key differentiators.
Armed with well-trained relationship officers who empower the customers to select the right loan mix, growing alternate channels, extensive branch network and ground presence, we are well-placed to scale up the business exponentially. Currently, we operate at 240+ locations in eight states: Rajasthan, Madhya Pradesh, Maharashtra, Gujarat, Delhi, Chhattisgarh, Punjab, and Haryana. We aim to expand our product offering to all AU SFBs 1,000+ bank locations in the years to come.
• Despite the 250 bps repo hike in the last financial year and discontinuation of PMAY (U) subsidy to EWS and LIG segments, we were still able to scale up our home loan business with 61% growth in FY 2022-23 over FY 2021-22
• We have funded over 26,000 homes till date and approx 11,000 of these homes in FY 22-23 helping the customer get their dream home
• Adoption and implementation of strategic steps in the dynamic market environment by using our expertise in urban and core markets, our right product mix, and our commitment to serving the unserved have led us to acquire a good set of customers and a quality portfolio
• We are committed to building a mass-market Forever Bank that focuses on building longterm sustainable relationships with its valuable customers.
AU SFBs linchpin strategy has been about penetrating rural/ semi-urban areas, and we have around 58% loan count in these areas, with 41% funding going to salaried individuals and 59% to self-employed
• We have consistently invested in nurturing talent and developing leaders and that has helped us build a quality book. The product structure around housing finance is well- equipped to cater for all kinds of housing needs. With that, we are focusing to build digital adoption i.e., E-KYC, E-loan agreements, etc. for onboarding home loan customers
• The housing market is set to chart a new chapter of growth, fueled by affordability, a reinforced desire to own a house, and renewed interest from all buyer categories and we expect FY 2023-24 to be another year of credit growth for financial institutions
^ Commercial Banking
Our commercial banking business caters to various segments of small and medium-sized businesses, including MSMEs, asset finance companies, housing finance companies, MFIs and real estate developers. We categorise our commercial banking business into:
| Category-wise Assets | (H crore) | ||
| Loan Portfolio | FY 2022-23 | FY 2021-22 | FY 2020-21 |
| Business Banking | 4,969 | 2,900 | 1,824 |
| Agri Banking | 3,998 | 2,259 | 1,127 |
| NBFC Lending | 2,551 | 2,036 | 1,426 |
| Real Estate Group (REG) | 1,243 | 795 | 626 |
FROM DREAM, INNOVATION, TO EXPANSION.
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Business Banking
Business Banking provides working capital facilities (overdraft, cash credit, letter of guarantee, bank guarantee) and long-term facilities (term loans) to wholesalers, retailers, traders, manufacturers, service providers, contractors, distributors, educational institutes, and healthcare enterprises in the market.
The Banks focus in this segment is on programme-based lending, which is granular and well-collateralised. Our focus on 360? customer-centricity and internal collaboration enabled us to deliver a wide spectrum of solutions addressing their evolving business needs such as customised offerings, faster turnaround time and transaction convenience.
During the fiscal, we witnessed strong growth in deposits and advances led by our focus on building granularity across businesses. Our portfolio registered a healthy YoY growth of 71% in FY 2022-23.
Our disbursements across the product segments continued to improve sequentially and touched new highs during the year led by improved rigour, rhythm and operational efficiencies resulting in total number of customers crossing 5,400 during the year.
Our continuous monitoring of exposure, usage of various EWS to take corrective action wherever necessary and proactive analysis and detection of stressed cases have led us in maintaining a healthy portfolio with 0.18 % NPA in the FY 2022-23.
A key differentiator for Business Banking is our self sustainability, i.e., the book is largely funded through own liabilities. We have been successful in growing liability relationship with our customers and aim to deepen the relationship further by offering a wide range of CMS solutions and enhancing our customers banking experience.
Our strong performance in FY 2022-23, gives us confidence that we are on track to achieve our strategic objectives. With constant awareness of the changing macro-economic variables along with adherence to the regulatory compliances, we are optimistic that our strategy to diversify and build granularity will help us deliver sustainable growth.
D4,969 cr
Loan portfolio
0.2%
GNPA
Agri Banking
Bank continues to focus on funding to various Agri Value chain actors/ anchors like flour/dal/oil/rice mills, Agri & food processors, dairy units, warehouses/cold storages, animal feed manufacturer, seed multipliers, poultry farms, nursery, Cotton ginning, Financing to Farmer Producer Organisation (FPO)/ Farmer Producer Company (FPC), Hi-tech Agriculture activities, green financing like solar projects. Bank is totally committed to furthering the Governments agenda by supporting its various schemes be it FPO/
Agri infra (AIF) /Prime Minister formalisation of micro food processing enterprises (PMFME)/ PM Kusum (Pradhan Mantri Kisan Urja Suraksha Evam Utthan Mahabhiyan Scheme for farmers). Agri Banking business has crossed gross portfolio of ?3,900 crore with stable and granular asset quality. During entire year incremental disbursement of ~?2,500 crore is made due to conducive environment and by growing our footprints into newer geographies like Uttar Pradesh, Andhra Pradesh/Telangana and West Bengal.
Farmer Producer Organisations (FPOs): Leveraging the Government scheme for formation and promotion of 10k new FPOs (Credit guarantee is available from CGTMSE/NABARD), Bank has aligned its business goal with national priority, and is funding eligible FPOs for working capital and term loan requirements.
Scale up of business was done through support from ITC Agri business division by funding FPOs promoted/nurtured by them. As on March 31, 2023, we funded 102 FPOs in three states viz. Rajasthan, Madhya Pradesh and Maharashtra. We have touched more than 35,500 farmers lives through our FPO initiative. Going forward, we wish to expand to other states like Gujarat and Uttar Pradesh as well to augment business. Through this initiative, Bank will be able to reach a larger number of small and marginal farmers.
PM Kusum: The governments, both at the Central and State levels, have been providing strong fillip for harnessing renewable energy potential. Solar Energy occupies a critical place in Indias power strategy due to its scalability, easy deployability and availability of abundant sunshine. In line with government objective and mission, bank has disbursed 9 renewable energy projects in FY 2022-23 which facilitated in mitigating carbon emissions and also improving economic well-being, and hence promoting green banking.
Q Real Estate Group
Real Estate group caters to the credit needs of the developers, who specifically operate in either small scale projects (up to two tower projects) or affordable and mid housing segments.
Basis the understanding so developed over the years, the business model is designed to fund for the completion of the project and avoid funding of growth capital for the developers.
Certain specific parameters, like financial closure and avoiding over- or under-funding are key to our assessment. The disbursement pattern is designed as Activity-
Based Disbursement rather based on percentage completion method.
The selection of the customer is based on the logic of the relationship being of high importance to both the developer and Bank. In other words, we would prefer not to be a non-significant lender to a borrower. Moreover, the developers focusing on developing limited number of projects in a specific concentrated sub micromarket are preferred over large and over leveraged customers.
Along with important policy initiatives of Government such as Housing for All and the PMAY, the government has been developing infrastructure mega-projects like highways, new airports, metros, etc. These factors will stimulate both the quantitative and qualitative growth of real estate portfolio.
Q NBFC Lending
Our loan portfolio has over 150 Non-Banking Financial Companies (NBFCs) with presence in over 15 states/UTs in the country.
Our book has shown resilient performance despite macro headwinds like Demonetisation,
NBFC crisis and the COVID-19 pandemic and our key advantage is our ears-to-the ground approach, and having retail infrastructure in areas where these NBFCs are active.
Our NBFC customer profile is predominantly secured, with approximately 65% of funds being allocated to asset financing customers who provide loan against collaterals such as CV, 2WLs, MSME, HFC, and gold, among other assets.
Our client selection looks at demonstrated track record of raising timely debt and equity while maintaining low leverage. The median leverage of portfolio companies is approximately 2.2X. The portfolio in the A and above category has been 62% as of March 31, 2023.
We have also been successful in growing liability relationship by extending multiple banking products like transaction banking, CMS, CA/SA, and ACH/NACHs, including e-NACHs, corporate credit card, and corporate salary accounts, among others.
Q Digital Banking
Our digital proposition has accelerated customer acquisitions and increased engagement.
43% of our customers acquired in FY 2022-2023 were through digital products and at a much lower cost compared to physical acquisitions. We won high ratings and accolades and were awarded Best Technology Bank and Best Digital Engagement by the Indian Banks Association (IBA), and our Digital Savings Account was rated the Best in Industry by Forbes Advisors.
AU0101 update
Since the launch of AU0101-our digital bank in June 2021, it has grown nearly four-fold with 19 lakh digital customers and 11 lakh monthly active users. Our digital bank offers a range of services including deposits, payments, credit cards, loans, investments, insurance, recharge, and gift cards. AU0101 differentiates itself from its peers with seamless onboarding and an intuitive interface. We are also integrating our digital bank with the countrys public digital infrastructure and are among the first banks to go live on the Account Aggregator framework.
In addition to the AU0101 app and Net Banking, we made further progress on our other channels of digital banking. Our chatbot auro, and WhatsApp Banking are now more powerful than ever and more than 38 account and card-related services are being fulfilled on these channels. Moreover, we are also working on several initiatives to offer a powerful digital banking proposition for small merchants.
Through AU0101, we have also continued to scale up our digital distribution.
Our video banking function has also grown significantly as we deliver personalised, secure services through video calls. We opened 2.9 lakh full KYC accounts and raised over H1,150 crore in deposits. Video banking services are now also available for banks NRI customers, with 400+ account related services available over a video call. We recently added digital current account opening through video KYC, aiming to expand our suite of digital video banking services.
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0 Credit Cards
India has always been severely underpenetrated when it comes to credit cards. With only ~7 crore cards issued to date, we see a huge potential for growing market demand for credit cards. Sustained growth of this market is also imperative as credit cards are integral to retail digital payments that have seen strong adoption and impressive growth. With the launch of our own Credit cards in 2021, we have positioned ourselves strongly to tap this opportunity.
Our credit card proposition continues to achieve scale with strong performance across key metrics. We have issued more than 5 lakh cards with a monthly issuance run rate reaching 50,000+ cards in March 2023. Just within two years of launch, we are among the top 10 issuers in the country in terms of incremental monthly issuance.
We launched LiT, Indias first customisable credit card proposition, and SwipeUp, a programme that allows cardholders from any issuer to upgrade their card in a simple, 3-step digital way. With such offerings, our credit card proposition is at the forefront of innovation and customer-centricity in the industry.
We have built strategic partnership with NPCI and are leveraging the extensive reach and secure infrastructure provided by NPCI. This partnership aims to deliver specialised credit card products and services that empower small businesses and self-employed professionals to thrive in todays dynamic market. We have launched Business cash back credit card with Rupay in April 2023 in presence of our MD Mr. Sanjay Agarwal and NPCIs MD and CEO Mr. Dilip Asbe.
From onboarding to services, AU0101 app offers a full suite of card management features, and we are fulfilling 14 card-related services over WhatsApp and Chatbot banking as well. To leverage our customers presence on other platforms in the digital ecosystem for better engagement on our cards, we have enabled the Tap and Pay feature on Indias leading payment apps. LiT card, where customers can digitally choose features as per their requirement and pay per feature, further shows our intent to increase digital engagement with customers.
Delivering a digital native experience has resulted in encouraging response with over 90% of our cards being activated within one month of issuance and a high proportion of those being actively used for transactions every month. At ?20,500 spends per card per month, the average spend on our cards also stood better than the industry average in March 2023.
To execute the credit cards opportunity, we have built multichannel distribution targeting specific segments. Against 2,900 locations from where we were sourcing cards till FY 2021-22, we are now sourcing from 4,300+ locations in the country. While our well-established digital channels and strong digital partnerships are enabling us to scale in urban markets, our traditional strength in semi-urban and rural markets through physical distribution touchpoints is poised to enable our expansion in those markets as well. To further augment our distribution capabilities and target specific customer segments, we are also launching co-branded credit cards with top players in certain segments. We have also recalibrated our credit decision rule engines to source cards across customer profiles including self-employed, NTC (New to credit) and others, and manage credit risk.
We will continue to innovate and scale our credit card proposition to unlock limitless possibilities for our consumers.
Q Merchant Solutions Group
Merchants have been the core of our business. They constitute a majority of our customer base and we have been traditionally serving this segment with innovative solutions around business loans.
With the increasing formalisation of businesses through government initiatives such as Udyam registrations, NIC codes, GST, and the digitalisation of commerce, we believe this segment is poised to experience sustained growth.
Our proposition for small merchants has also scaled up to newer heights this year and AU UPI QR continues to play a key role as a low-cost acquisition tool. We have installed over 10 lakh QRs to date and 68% of these are activated. Along with UPI-QR, our POS business has also been steadily increasing. We have installed 20,000+ devices to date, processing transactions of H 2,000 crore+.
Prioritising customer engagement has led us to record higher transactions, clocking 170% YoY growth in the number of transactions, and 171% YoY growth in the value of transactions -both remaining higher than the growth of the number of QRs installed.
We have also scaled up our unsecured business lending basis transactions on our QRs. We have disbursed H200 crore of such loans with an average ticket size of H1.8 lakh. We have started lending to existing customers beyond the preapproved base and to New to Bank customers as well. With higher transactions rendering us richer data, we would further expand this programme, albeit cautiously.
While we have a very strong presence in this segment through our existing physical channels, we have built digital channels to augment our distribution.
We have recently launched a digital current account opening journey with integrated video KYC. We have also launched an upgraded digital journey for unsecured business loans.
We are also building our capabilities to tap the opportunities available through ecosystem developments around public digital infrastructure. We have started lending through OCEN network on GEM sahay portal and we are working to integrate the Account Aggregator framework in our digital unsecured lending journey for no pre-approved existing customers and New-to- Bank merchant customers. As these ecosystems evolve further with the implementation of ONDC and the extension of DigiLocker to entities, we are in a position to capitalise on the developments.
To offer one-stop digital banking solutions to cater to the segments requirements, similar to what we offer for our retail customers in the form of AU0101, we are working to build an integrated merchant banking application. Recently launched digital journeys for Current Account onboarding, unsecured business loans and lending through OCEN on GeM Sahay would be integrated into this application. Along with these, solutions around payments (UPI QR), segment-focused credit cards and integration with all the ecosystem platforms/networks would be key differentiators of your Banks proposition to this segment.
A Treasury and
Debt Capital Market
The treasury function at AU SFB is primarily responsible for our Asset Liability Management (ALM), which includes effective fund planning and positioning, day-to-day liquidity and fund management, managing statutory reserves in adherence to the statutory guidelines and judiciously managing investments and trading portfolio, according to regulatory and internal policy frameworks.
In addition, risk management is a key focus for us, whereby market risks, ALM risks, interest rate risks, and liquidity-related risks are effectively monitored and managed. The treasury facilitates mobilisation (CASA, retail deposit and bulk deposit) and rupee borrowing in the form of CDs, term money, securitisation of portfolio, subordinated debt and re-finance from various domestic financial institutions (NABARD, SIDBI, MUDRA, NHB and others), with focus on cost optimisation and ALM management. The treasury closely works with the internal teams and monitors deposit mobilisation, besides regularly analysing the competitive landscape of interest rates to benchmark our deposit rates. It also regularly monitors the portfolio, the incremental cost of funds and the CD ratio.
It undertakes the implementation of suitable measures to optimise the cost of funds by facilitating branches to garner granular retail deposits through competitive rates of interest considering the prevailing interest rate scenario, and competition in the market, among other factors.
During FY 2022-23, major central banks, including RBI, shifted their policy stance from supporting growth to managing inflation due to geopolitical conflicts that led to synchronised hikes in policy rates and tighter liquidity conditions to rein in inflation. While RBI raised policy rates by 250 bps, major advanced economies saw sharper hikes. This resulted in a steep rise in the shorter end of the yield curve and 1 year T-bill rising 270 basis points, and 5-10 years moving up by 100 basis points. The treasury, therefore, avoided taking any MTM risk in the AFS portfolio and showed caution when investing in non-MTM instruments like T Bills and High-Quality non-SLR instruments, viz. CP CDs and NCDs, to optimise returns on liquidity.
The treasury, however, continued to gradually build its HTM portfolio within the regulatory permissible limit of 23%, at attractive levels.
However, despite the challenging interest rate environment, we could maintain our CASA ratio and Cost of Funds (CoF) corresponding to the previous year.
As a part of the overall strategy, the treasury regularly ensured the maintenance of sufficient liquidity buffers in the form of excess SLR and high-quality non-SLR instruments to generate liquidity in case of requirement. Further, your Bank continues to have alternate channels of fundraising.
In April 2023, your Bank received the Authorised Dealer Category-I (AD Cat-I) license from Reserve Bank of India (RBI). This license will allow your Bank to undertake various foreign currency (FCY) transactions and operate in the foreign exchange market. It will also allow us to onboard a new category of customers and service our existing customer base with a full range of foreign exchange services on the trade and remittance side. The services include issuing forex cards, and import and export credit solutions, making your Bank complete in terms of our offerings to customers.
? Financial and Digital Inclusion
The vision of our financial and digital inclusion SBU is to build a society in which every individual is financially included in a way that enhances their livelihoods and drives sustainable development. The process of ensuring access to and usage of quality financial services at an affordable cost in a transparent manner is called financial inclusion.
In terms of ensuring access, around 30% of our total touch points/branches are in unbanked rural centres (Tier-VI towns with a population less than 5,000, and Tier-V towns with a population less than 10,000). We are also present in 52 special focus districts with 92 touchpoints.
As part of our financial and digital literacy initiatives, in FY 2022-23, we organised 1,700+ financial and digital literacy camps at our rural branches. We also conducted a capacity-building programme for these branches in collaboration with National Centre for Financial Education (NCFE).
As part of the PM SVANidhi initiative, we supported 800+ street vendors, and under the IGUCCY initiative, we supported 580+ micro-entrepreneurs.
Risk Management
Over quite some time, the finance industry witnessed significant transformations due to advancements in technologies, business model transformations, changing regulatory standards, and many other external and internal factors. Risk is the most critical element for banks, and in the banking industry, this element is paramount, considering banks are custodians of public deposits. The nature of risk in the industry is wide and it includes Credit Risk, Market and Liquidity Risk, Operational Risk, IT and Cyber Security Risk, Compliance Risk and others.
Your Bank has adopted a multilayered risk management process to identify, assess, monitor, and manage risks through the effective use of processes, information, and technology.
The good risk management practices of your Bank helped in navigating the tough years of the pandemic, and our Enterprise Risk Management (ERM) framework helps us strategically benchmark the practices across different business lines to best-in-class levels.
Your Bank has an integrated risk management function that sits independent of business functions and is entrusted with the responsibility of managing risks prudently. The risk management philosophy and approach are designed to protect depositors, customers and shareholders interests.
The risk management function considers risk as an integral part of growth and accordingly integrates its scope in sync with the growth of your Bank. The risk function understands that growth comes with inherent risk and it is to be addressed through adequate controls and measures.
For effective risk management across your Bank, it is ensured that all officials at the leadership level are suitably qualified and experienced as per industry standards, with the necessary skill sets, and should be updated as an ongoing process. We also arrange trainings for the officials to enhance their competencies. This helps us effectively ensure Risk Mitigation and Management.
Your Bank had developed an enterprise risk assessment model that is designed to strengthen our ability to identify, measure, monitor and mitigate and report all risks in a timely and comprehensive manner.
The Risk Management Process is monitored by risk management policies and the delegation matrix approved by the Board of Directors. 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 has oversight of the managements efforts to balance growth and prudent risk management while creating value for stakeholders.
Pursuant to Regulation 21 of the SEBI Listing Regulations, the Bank has constituted a Risk Management Committee which oversees the implementation of the risk governance framework in line with the guiding principles and as mandated by the regulatory provisions. The Banks Chief Risk Officer (CRO) administers the risk associated key verticals i.e. Credit Risk, Market and Liquidity Risk, Operational Risk, Fraud Risk, Information Security Risk, Compliance Risk and other risks under the Board-approved risk management policies and by the approval and responsibility delegation matrix. The CRO has unhindered access to the Risk Management Committee of the Board and interacts regularly with the Committee Members. The CRO is primarily responsible for making decisions on risk management issues that directly impact the strategic direction of the Bank and monitoring the progress of risk management activities.
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 your Bank through strengthening underwriting norms, and keeping a 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) oversees 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 forwardlooking and are reviewed in sync with future business plans. Loan administration and monitoring are carried out through Portfolio Profiling, Early Warning Framework, Rapid Portfolio Review, Annual Monitoring of High-Value Customers and other credit risk activities.
The CRNPAC looks after credit risk assessment on a 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 a significant contribution to the asset book.
Credit Risk and NPA Management Committee follows the listed guiding principles:
• Ensure that a governance framework is established for effective oversight, segregation of duties, monitoring and management of Credit Risk and NPA Committee
• 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 Reserve Bank of India (RBI) from time to time
The Board Delegated Credit Committees submit their updates to the Risk Management Committee of the Board at regular intervals.
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 a Board delegated Operational Risk Management Committee (ORMC) to oversee the implementation of the operational risk management framework across the Bank and advise on the implementation of measures for risk mitigation which further reports to the Risk Management Committee of the Board. Your Bank follows an integrated risk approach, where operational risks and their monitoring fold into the Chief Risk Officer (CRO) and ORMC. We have a board-approved Operational Risk Management Policy, which includes a comprehensive Operational Risk Management Framework for documenting, assessing, and periodically monitoring various risks and controls linked to various processes across all business verticals.
Your Bank also has a Risk Containment Unit (RCU) 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 over H1 crore or
more are specifically reported and dealt with 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 Digital Banking services, we have achieved significant milestones in both customerfacing technologies and internal digitisation. To ensure safe and secure transactions and improve the customer experience on the digital front, your Bank monitors the transactions on an ongoing basis. As we prepare to take the next step in the world of Digital Banking, we are confident that our technological capabilities will propel the next phase of growth.
Your Bank has in place a comprehensive Outsourcing Risk Policy in line with RBI guidelines released on a time-to-time basis keeping in view the extensive use of outsourcing by the Bank. The Board shall have 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 (RMCB) 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 guide to adopt sound and responsive risk management practices for effective oversight, due diligence and management of risks arising from outsourcing activities.
Your Bank has a comprehensive Business Continuity Management (BCM) plan, policy, and procedures in place to ensure the 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 and minimising the impact on the IT systems of the Bank. Your Bank has dedicated DR sites and there are periodic drills in place to validate the effectiveness of our business continuity plans. These controls help execute immediate action in case any business/application level issue arises which is leading to an impact on banking services/operations. The learning from the BCP drill exercises is used in refining the BCP framework.
Market Risk, Liquidity and Asset Liability Management
Risk
Market Risk 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 your Bank sets the benchmark for market risk exposures, the performance of portfolios vis- a-vis the market risk limits and comparable benchmarks, which guide to optimise the risk-adjusted rate of return of the Banks investment portfolio. Liquidity risk refers to the institutions inability to fund an increase in assets or withdrawal of liabilities and meet both expected and unexpected cash & collateral obligations at a 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 per the risk appetite of the Bank. The Bank utilises analytical tools for the market risk management of its trading and investment portfolios.
The Asset Liability Management (ALM) Policy stipulates a broad framework for liquidity risk management to ensure that the Bank can 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 a defined governance structure in consonance with our Risk Appetite.
The Asset Liability Management Committee (ALCO) of AU 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 operates within the risk appetite approved by the Board.
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. The 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 cybersecurity framework for securing its IT infrastructure and systems. IT Steering Committee and Information Security Risk Management Committee reports to Board level IT Strategy and Information Systems Security Committee. This committee reviews and monitors IT security infrastructure and vigilance over IT-related vulnerabilities against emerging cybersecurity risks.
The Chief Information Security Officer (CISO) is responsible for monitoring the information security risks covering all aspects of data security for your Bank and reports to Chief Risk Officer (CRO). Cyber Security Operation Center (CSOC) with qualified professionals reports to the CISO for monitoring of real-time cybersecurity glitches. Your Bank has also deployed advanced controls at various layers to ensure that cybersecurity risk is minimised.
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 a 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 the values, Code of Conduct, or policies of the Bank.
Compliance Risk Management
Risk
The adoption of effective KYC/AML standards is an essential part of the Banks Risk Management practices. Banks with inadequate Compliance (AML/KYC) risk management programmes may be subject to significant risks, especially legal and reputational risks. Sound Compliance (AML/KYC) policies and procedures not only contribute to a Banks overall safety and soundness but 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
Your Bank has a dedicated Compliance Department that continuously monitors new developments and updates the Board and senior management about their implications.
There is a strong compliance culture with well-articulated policies concerning conduct, Vigil Mechanism, AML & KYC, and engagement with third-party vendors. The Compliance and Risk departments update the status of compliance and controls to the Audit Committee of the Board (ACB) regularly, to review and for advice on the implementation of measures for AML /KYC risk mitigation, along with effective transaction monitoring.
Human Resources
AU SFBs Human Resources department takes great pride in its proactiveness when it comes to implementing the best policies and practices that foster a culture characterised by participation, collaboration, cohesion, and a strong focus on employees. We are thrilled to have received the Great Place to Work certification for the third consecutive time and have also been acknowledged as one of the Top 25 Best Places to Work in the BFSI sector. Our commitment to continuously benchmark our people practices ensures we are always in alignment with our business objectives and provide a rewarding experience to our employees.
Credit Management
The credit risk framework at AU SFB is established through credit policies and product policies that outline the principles and control requirements for extending credit to customers across various business sectors. These policies and standards encompass all stages of the credit cycle, including origination, credit approval, documentation, administration, monitoring, and recovery.
To control the magnitude of credit risk, your Bank has implemented prudential limits and caps on various aspects. The organisation places great importance on timely risk reporting, supported by effective control mechanisms. Loan administration and monitoring are conducted through portfolio profiling, an early warning framework, and other credit risk activities that focus on asset quality trends and concentration.
Your Banks credit culture mandates lending decisions be based on thorough credit analysis, with a comprehensive understanding of the loans purpose and alignment with the customers financial situation and ability to repay from their business operations. Off-balance sheet transactions and on-balance sheet transactions undergo the same rigorous credit analysis. We have credit-approving authorities and committee structures that are linked to the risk levels associated with borrowers and transactions. The level of collateralisation is determined based on the nature of the transaction and the credit quality of the borrower. Delegation of authority is reviewed at least annually.
Despite the challenges posed by the external environment in FY 2022-23, our asset quality demonstrated improvement and is expected to remain stable.
Collections
Despite asset quality facing recurring periods of sectoral stress, and the challenges posed by the COVID-19 pandemic, our collection process has demonstrated remarkable resilience. We have implemented strong mechanisms to effectively manage collections, including dedicated business- level collection teams, realtime tracking dashboards, data analytics-driven decision-making, specialised functional teams to handle all aspects of the recovery process, and insurance protection against collection defaults.
These measures have played a crucial role in maintaining robust collection efficiencies throughout the pandemic period, over the past three years. It is worth noting that our asset quality performance is, to some extent, a testament to the strength of our collection management system. Various external factors such as geography, delinquency, products, and customer repayment history, as well as internal factors like our collection strategy, collectively influence our collection outcomes.
We continuously enhance our collections methodology through regular audits, reinforcing compliance measures, and providing regular training to ensure that our teams and leadership are well-informed about important collection practices and protocols.
Internal Control Systems
Our comprehensive internal controls are guided by robust policies and procedures, creating a strong control framework.
These controls undergo periodic reviews across all processes, units, and functions. The business credit teams actively monitor and address emerging risks through built-in processes. The controls establish standards and establish policies and procedures for managing risks, ensuring compliance with regulatory guidelines, laws, operational controls, and ethical conduct. Additionally, senior officers within the operating and business units oversee the implementation of various risk mitigation measures.
To ensure effective oversight, we have established executive-level committees that include representatives from different business and control functions. These committees are responsible for reviewing and supervising critical aspects of our operations.
Our internal audit function operates independently to assess the adequacy and effectiveness of internal controls, information security controls, risk management, governance systems, and processes. We have a dedicated information systems audit team that identifies and addresses technology and IT-related security issues aligned with the complexities of our operations. The internal audit department and compliance function conduct reviews to ensure business units adhere to internal processes, procedures, regulatory requirements, and legal obligations. They provide timely feedback to management for corrective action, including minimising any potential design risks. The Audit Committee of the Board plays a crucial role in evaluating the performance of the audit and compliance functions, as well as assessing the effectiveness of controls and compliance with regulatory guidelines.
Based on our Boards evaluation, our internal control systems are considered adequate and effectively operational.
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- Prevent Unauthorized Transactions in your demat / trading account Update your Mobile Number/ email Id with your stock broker / Depository Participant. Receive information of your transactions directly from Exchanges on your mobile / email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL/ CDSL on the same day." - Issued in the interest of investors.
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www.indiainfoline.com is part of the IIFL Group, a leading financial services player and a diversified NBFC. The site provides comprehensive and real time information on Indian corporates, sectors, financial markets and economy. On the site we feature industry and political leaders, entrepreneurs, and trend setters. The research, personal finance and market tutorial sections are widely followed by students, academia, corporates and investors among others.
Risk Disclosure on Derivatives
- 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
- On an average, loss makers registered net trading loss close to Rs. 50,000.
- Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
- Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
Copyright © IIFL Securities Ltd. All rights Reserved.
Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213, IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
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This certificate demonstrates that IIFL as an organization has defined and put in place best-practice information security processes.
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2024, IIFL Securities Ltd. All Rights Reserved
Follow us on
ATTENTION INVESTORS
- Prevent Unauthorized Transactions in your demat / trading account Update your Mobile Number/ email Id with your stock broker / Depository Participant. Receive information of your transactions directly from Exchanges on your mobile / email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL/ CDSL on the same day." - Issued in the interest of investors.
- KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.
- No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account."
www.indiainfoline.com is part of the IIFL Group, a leading financial services player and a diversified NBFC. The site provides comprehensive and real time information on Indian corporates, sectors, financial markets and economy. On the site we feature industry and political leaders, entrepreneurs, and trend setters. The research, personal finance and market tutorial sections are widely followed by students, academia, corporates and investors among others.
Risk Disclosure on Derivatives
- 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
- On an average, loss makers registered net trading loss close to Rs. 50,000.
- Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
- Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
Copyright © IIFL Securities Ltd. All rights Reserved.
Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213, IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
We are ISO 27001:2013 Certified.
This certificate demonstrates that IIFL as an organization has defined and put in place best-practice information security processes.