AU Small Finance Bank Ltd Management Discussions.

MACROECONOMIC ENVIRONMENT

Global growth continued its cyclical upswing and remained steady in the first half of the previous year. However, the pace of growth slowed down in the second half primarily due to moderating investments, geopolitical uncertainties, risk aversion and elevated trade tensions. Despite the rise in crude prices, inflations across most developed and major developing economies remained low. This slowdown in economic activity appeared to be synchronised and was reflected in several downward revisions to the 2019 global growth forecasts. Reckoning the slowdown, most central banks shifted towards a more accommodative monetary policy stance to extend a growth stimulus. In some economies, fiscal stimuli are being used to support growth. Given the interplay of these events, Organisation for Economic Co-operation and Development (OECD) projects that weakness may persists in 2019 and estimates that the real global GDP would grow at a sub-par rate of 3.2% in 2019, from the higher levels of 3.5% in 2018.

India, while being the fastest growing economy and averaging GDP growth at 7% levels, mirrored a similar trajectory in the previous fiscal with growth slowing down in the second half. The slowdown was due to a host of external and internal factors such as weak industrial output, led by contraction in manufacturing, capital goods and consumer durables, coupled with subdued urban and rural demand. Several high frequency indicators such as growth in manufacturing and capital goods, index of industrial production (IIP), credit flow to micro, small and medium enterprises and auto sales, among others pointed to a slackening urban & rural demand and investment activity. Moreover, an increase in the crude oil (from levels of US$56 per barrel in FY 2017-18 to US$70 per barrel in Financial Year 2018-19) and headwinds in financial markets also impacted the growth momentum in the second half of the previous fiscal. In fourth quarter, Gross Domestic Product (GDP) growth dipped to 5.8%, which led to real GDP growth for FY 2018-19 coming at a five-year low of 6.8%, further lower from Central Statistics Offices (CSOs) second advanced estimates of 7.0%, released in February 2019. However, in the last financial year, India improved its ranking in World Banks Ease of Doing Business 2019 survey and jumped 23 places to climb to 77th place globally. This has been an outcome of governments focus on reforms, on improving the quality of infrastructure, implementation of key reforms including the Insolvency and Bankruptcy Code (IBC), among other things.

On the external front, Reserve Bank of Indias (RBIs) latest estimate suggests that Indias Current Account Deficit (CAD) is expected to widen to 2.5% of GDP in FY 2018-19 because of higher trade deficit and imports growing more than the exports. Though there was slippage on the fiscal front too as the target for fiscal deficit, set originally at 3.3% was revised upward to 3.4%. However, it is important to highlight that India continues to remain firm on meeting its medium-term fiscal deficit targets of 3.0% by FY 2021-22.

Retail inflation, measured by the Consumer Price Index (CPI), remained moderate and within the RBIs targeted 4% range for most part of FY 2018-19, as higher agricultural productivity kept food (~46% of CPI) inflation benign. Wholesale inflation (WPI) too remained in low single-digits.

The moderate inflation scenario prompted the RBI to return to its neutral stance from calibrated tightening (adopted between October 2018 and December 2018). The apex bank announced a 25-basis-point cut in the repo rate in its last policy review of FY 2018-19 to boost economic growth. Liquidity in money markets in general shrunk in the second half and the apex bank took suitable active measures, including Open Market Operations (OMO) and introduction of Foreign Exchange (FX) swap auction facility for banks, to augment the liquidity.

Indias strong fundamentals, prudent macroeconomic policy framework, continued focus on reforms, strong banking and capital markets and a massive base of over 1.3 billion populous, make it one of the few most resilient economies globally. Besides, the present governments sweeping majority in the recent general assembly elections ensures continuity of reforms and growth agenda, going forward. However, weakening investment activity, probability of El Nino effects on monsoon and uncertain global outlook could impact the growth going forward. World Bank, in its latest projection has retained the GDP growth estimates for India at 7.5% for the next two years.

INDIAN BANKING INDUSTRY

The banking and financial services industry has played a pivotal role in supporting the US$2.65 trillion economy to maintain its growth momentum. For Indian Banks, FY 2018-19 was the second consecutive year of double digit credit growth. As per RBI, in 2019, Banks credit rose 13.1% to 98.18 lakh crore. Private sector banks recorded over

28% credit growth year-on-year (y-o-y) while public sector banks registered 5.5% growth. Retail loans continued to be at the forefront of systemic credit growth followed by services. Within the retail segment, the top three products were credit cards, housing loans and personal loans. Loans outstanding under credit cards, grew 28.6% y-o-y in FY 2018-19. This was more than double the 13.1% y-o-y growth recorded by overall bank credit.

Credit growth recovers in FY 2018-19 (%)

Non-food credit 12.3
Services 17.8
Personal 16.4
Agriculture and Allied 7.9
Industry 6.9

Improving credit offtake from the agriculture sector was another highlight of the year, though loans to corporates continued to lag. Lending to Non-Banking Financial Companies (NBFCs) witnessed a mixed trend, though NBFC borrowings grew at a rapid rate till September 2018, but the liquidity squeeze at some NBFCs due to asset-liability mismatch reversed the trend. In a bid to address this liquidity squeeze, RBI introduced a slew of measures such as allowing reduction in holding period of loans before securitisation by NBFCs, allowing banks to provide Partial Credit Enhancement to NBFC bonds, increasing single borrower exposure limits for NBFC lending by banks, simplifying the external commercial borrowing framework and relaxing the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) where RBI allowed banks to use government securities equal to their outstanding credit to NBFCs and HFCs, to be used to meet Liquidity Coverage Ratio (LCR) requirements.

While higher provisioning due to deteriorating asset quality had pulled down the banking sector in FY 2017-18, the strong revival in bank credit growth in the first half of FY 2018-19 of private and public sector banks suggests an overall improvement in the health of banks. Credit to industry, which remained depressed in FY 2017-18, also pointed to an uptick. Stressed assets of scheduled commercial banks (SCBs) began to stabilise, albeit at an elevated level, capital positions were buffered and the provision coverage ratio improved to 52.4% by end-September 2018 (Source: RBI).

Deposits continued to grow at a steady pace across all banks. Private sector banks continued to lead deposit mobilisation. However, deposit growth for public sector banks remained low, amid visible signs of a gradual pick up.

As on 31st March 2019, growth in deposits lagged the credit growth as deposits grew at 9.4% to 125.59 lakh crore. This was partly a function of the liquidity crisis at some NBFCs, which brought commercial paper trading to a virtual halt. This in turn, resulted in higher demand for bank loans, widening the gap between credit and deposit growth.

Private banks continued to outpace their public sector peers on both credit as well as deposit growth, as many public sector banks got tied up with resolving their bad loans and faced growth restrictions under the Prompt Corrective Action (PCA) framework.

Interim Union Budget FY 2019-20: Key positives

Proposal Impact on sectors
Section 80I-BA extended for one year. Under this section, 100% of profits derived from development of affordable housing projects is exempt from taxes. This benefit is applicable to projects approved till 31st March 2020 Positive for affordable housing companies
Tax Deducted at Source (TDS) limit for deduction of tax on rent is increased from 1,80,000 to 2,40,000 Positive for housing segment
Individual taxpayers with a taxable income of up to 5 lakh will get full tax rebate and will not be required to pay any income tax Provide tax relief to salaried individuals
Extension of Kisan Credit Card (KCC) scheme interest subvention to animal husbandry and fisheries Positive for KCC lending business of banks
Income support for farmers, interest subvention on loans (for full tenure) to farmers affected by natural calamities Improve asset quality on agriculture loans
Pension scheme for workers in unorganised sector Positive for MSMEs
TDS limit on interest earned on bank/ post office deposits raised from 10,000 to 40,000 May propel growth in bank deposits

OUTLOOK

Credit growth is expected to remain strong driven by the continued momentum in retail loans, a gradual recovery in private sector capex and the emergence of public sector banks out of the PCA framework. Improving economic growth and lower interest rates are other factors which should propel the growth in the medium term.

The retail and SME segments are likely to fuel loan growth, with demand for home loans, car loans and small business loans witnessing higher growth. Besides, growth in semi-urban and rural areas is likely to outpace that in urban areas, which should benefit players with a dominant presence in those markets.

It is expected that RBI will address the liquidity issues and the foreign inflows should increase because of a stable government. Moreover, there is a scope for interest rates to come down on the back of growth slowdown, benign inflation levels and liquidity squeeze.

SMALL FINANCE BANKS: UNIQUE, FAST-GROWING

Small Finance Banks (SFBs) were introduced by the RBI to drive financial inclusion for the unbanked and underbanked sections of the economy. In the two years of their existence, SFBs have made a remarkable impact and gained significant scale with a combined asset portfolio size of over 60,238 crore and a deposit base of over 37,500 crore as on March 2019.

SFBs are diligently delivering on the RBI mandate by engaging with customers and offering them a comprehensive suite of financial products and services through their sprawling branch network and digital platforms. Moreover, catering to demand for small ticket loans (for 50% of their portfolio) and the priority sector (higher exposure target of 75%) have always been their mainstay and core competence. Thus, the opportunity landscape for SFBs is expanding and the road ahead looks bright, presenting a win-win situation for both customers and SFBs.

KEY GROWTH SECTORS

Auto loans industry/Vehicle loans

In last few years, the opportunities in vehicle financing business have expanded beyond the traditional core segment of new vehicles to the used vehicle and refinance as well. This has been fuelled by multiple factors, including roll out of new used vehicle dealers by OEMs, emergence of well-funded online used car dealers offering certification, quality, ease of transfer and financing. This has opened a lot of opportunities for vehicle financers in India. The key trends of both the segments are outlined here under.

New vehicles - Trends and Opportunities

India is one of the biggest automobile markets in the world. In FY 2018-19, 2.62 crore new vehicles were sold in India which grew 5% from 2.49 crore vehicles sold in FY 2017-18. The five-year CAGR (FY 2014-19) for all vehicles sales was 7.4%, reflecting that it is cyclical in nature.

Vehicles sales in India

Particulars (in Units) FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 5-year CAGR
All vehicles including two-wheelers 1,84,23,223 1,97,24,371 2,02,68,971 2,18,63,281 2,49,81,312 2,62,67,783 7.4%
y-o-y growth 7% 4% 7% 14% 5%

Source: Society of Automobile Manufacturers of India

However, excluding two-wheelers, sales of new vehicle was 50.85 lakh units in FY 2018-19, which was more than 6.4% from 47.81 lakh units sold in FY 2017-18. The five -year CAGR (FY 2014-19) for new vehicles sales excluding two-wheelers was 7.1%.

Particulars (in Units) FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 5-year CAGR
All vehicles excluding two-wheelers 36,16,445 37,48,810 40,13,120 42,73,543 47,81,195 50,85,766 7%
y-o-y growth 4% 7% 6% 12% 6%
Passenger Vehicle (PVs) 25,03,509 26,01,236 27,89,208 30,47,582 32,88,581 33,77,436 6%
y-o-y growth 4% 7% 9% 8% 3%
Commercial Vehicle (CVs) 6,32,851 6,14,948 6,85,704 7,14,082 10,07,319 10%
y-o-y growth -3% 12% 4% 20% 18%
Three-wheelers 4,80,085 5,32,626 5,38,208 5,11,879 6,35,698 7,01,011 8%
y-o-y growth 11% 1% -5% 24% 10%

Source: Society of Automobile Manufacturers of India

Indian auto sales witnessed a mixed FY 2018-19, with passenger vehicle (PV) sales growth slowing significantly to 2.7%, while commercial vehicle (CV) sales increased by 17.6% over FY 2017-18.

In FY 2018-19, within the PV segment, the sales of new passenger cars and utility vehicle grew just marginally above 2% whereas the sales of new vans grew by 13.1%, albeit on a lower base, over the levels of FY 2017-18. Within CV segment, new medium and heavy commercial vehicles (M&HCVs) sales rose by 14.7% and light commercial vehicles (LCV) grew by 19.5% in FY 2018-19 over FY 2017-18.

The slowdown in new vehicle sales of PVs in the second half coincided with most NBFCs facing liquidity issue with elevation in their cost of funds. This resulted in rise in fresh loans yields and higher Loan To Value ratio (LTV) in some cases. However, despite the above, most vehicle lending NBFCs reported some slowdown with lower incremental loan spreads.

According to CRISIL Research, new PV sales are expected to grow at a CAGR of 7-9% over FY 2018-22 and will be driven by increase in nuclearisation, rise in disposable income, shorter replacement cycles, launch of newer models and electric vehicles.

M&HCV and LCV should continue to witness strong tailwinds and be aided by improved road infrastructure, Goods and Services Tax (GST) implementation paving way for bigger warehouses, increased e-tailing, last mile delivery opportunities and migration to newer emission standards. M&HCV and LCV is expected to grow between 6-8% and 5-7%, respectively over the next five years.

Used Vehicle - Cars

According to Indian bluebook, pre-owned car market has grown steadily in FY 2018-19. It has crossed the 4-million- unit mark and is 1.2x the size of new car market. The industry is seeing tailwinds post the rationalisation of GST to 12-18% and increased investments across the value chain from procurement to retail.

Indian pre-owned car industry is expected to reach between 6.7 to 7.2 million cars annually and will be valued at 50,000 crore by FY 2021-22 from current size of 4 million cars/year.

The growth drivers are as follows:

Migration of two-wheeler owners to pre-owned car owners and increased composition of value seekers

Trickle down impact of massive investment of 5,000 crore in Indias used car industry in previous four years

Leasing and corporate fleet buyers are expected to double in the next couple of years

Emergence of online market places catapulting options for on-line seekers

The banks also have more room to grow in this segment, as this segment is currently underpenetrated with only 17% purchases being financed. Market share of the organised channel of the pre-owned car market has almost doubled from 10% to 18%, from FY 2010-11 to FY 2018-19 and is expected to go up to 30% by FY 2020-22. The growth of the organised channel bodes well for the banks. Buyers who use the organised channel can be offered pre-approved loans as majority of the transactions are below 3 lakh and the ease of finance will encourage buyers to avail loans.

MSME LENDING MSMEs overview

Globally, Micro, Small and Medium Enterprises (MSMEs) are regarded as engines of equitable economic development. In India too, they are the backbone of Indian economy. As per the Annual Report FY 2017-18 of Ministry of Micro, Small and Medium Enterprises, in terms of value, MSMEs accounts for ~45% of the manufacturing output and ~40% of the total exports of India.

OVERVIEW OF MSMES IN INDIA AND AU BANKS FOCUS SEGMENTS

According to MSMED Act 2006, in India MSMEs are classified under following three subcategories basis the threshold investment in plant and machinery (for manufacturing enterprises) and investment in equipment (for units in services)

Nature of activity Micro enterprises Small enterprises Medium enterprises
For manufacturing enterprises investment in plant and machinery <=?25 lakh >?25 lakh but <= ?5 crore >?5 crore but <= ?10 crore
For services enterprises investment in equipment <=?10 lakh >?10 lakh but <= 2 crore >?2 crore but <=?5 crore

According to the Annual Report of the Ministry of MSME of FY 2017-18, India is home to about 63 million MSMEs, of which about 51% are in rural areas; micro enterprises accounted for 99%.

ACTIVITY WISE NUMBER OF MSMEs

Activity category

Estimated number of enterprises

Share(%)
Rural Urban Total
Manufacturing 114.14 82.50 196.65 31
Trade 108.71 121.64 230.35 36
Other Services 102.00 104.85 206.85 33
Electricity* 0.03 0.01 0.03 0
All 324.88 309.00 633.88 100

*Non-captive electricity generation and transmission and distribution by units not registered with the Central Electricity Authority (CEA)

SECTOR-WISE NUMBER OF MSMEs

Sector Micro enterprises Small enterprises Medium enterprises Total Share (%)
Rural 324.09 0.78 0.01 324.88 51
Urban 306.43 2.53 0.04 309.00 49
All 630.52 3.31 0.05 633.88 100

ACCESS TO CREDIT AND OPPORTUNITIES FOR AU BANK

Despite MSMEs significant contribution to GDP and ability to generate significant employment, loans to this segment have grown at a sluggish pace over the past few years, and there exists significant gap in addressable debt demand. According to International Finance Corporation (IFC), the addressable credit gap of MSMEs in India stands as high as 25.8 trillion.

Analysis of credit gap

Analysis of credit gap in MSME space Micro enterprises Small enterprises Medium enterprises Total
Debt demand 11.9 21.65 3.2 36.7
Share of debt supply 3.9 4.8 2.2 10.9
Credit gap 8 16.8 1 25.8

Credit Opportunities for Lenders in Indias MSME Space

AU Bank has emerged as one of the leading lenders to MSMEs since 2009 and is perceived as a trusted solution provider to the sector. With average ticket size around 10-12 lakh, AU Bank has catered to only 0.11 million units as on date and has a long way to grow in this segment.

Market share shifting from Public Sector Bank to Private Banks and NBFCs

Housing loans

With a population base of over 1.30 billion people, India ranks 2nd amongst worlds most populous countries. Out of this, rural population constitutes over 70% as nearly 0.93 billion people stay in rural areas. However, there is a massive shortage of housing in rural areas (around 43.6 million homes). Similarly the opportunity in urban areas is of ~18.8 million homes. Moreover, according to latest industry estimates, Indias mortgage penetration hovers around 10% and is expected to reach to 14% by FY 2021-22. With urbanisation and nuclearisation taking place at a rapid pace, clearly more houses are needed. It is expected that by 2030, nearly half of India will be residing in urban areas. Existing cities will have to grow beyond their boundaries and many new cities will come up.

The Government of India addressed this gap with massive and unprecedented impetus to the housing sector in the past two years, especially in the affordable housing space. Under Housing for All scheme, 60 million houses are to be built—40 million in rural areas and 20 million in urban areas by 2022—creating a holistic demand for housing industry. In 2018, the National Urban Housing Fund was launched with an outlay of 60,000 crore. Simultaneously, National Housing Bank (NHB) introduced stricter norms around capitalisation and borrowing limits for housing finance companies (HFCs). Earlier, government had promulgated Real Estate (Regulation and Development) Act, 2016, strengthening the confidence for prospective buyers.

Housing loans has been one of our main stay retail asset loan and was relaunched in Q4 of 2018. Through our housing loan offering, we aim to help our customers in building/buying the most important asset of their life and on board their entire family with us.

Gold loans

Indias organised gold loan market is likely to grow to 3,10,100 crore by 2020, at a three-year CAGR of 13.7% (Source: KPMG). Although gold has been one of the oldest forms of collaterals for loans, the organised gold loan segment still has very low penetration. Informal and unregulated players, including local money lenders control about 60% of all gold loan transactions and charge usurious interest rates due to the lack of formal financing channels. Of the organised part, PSBs and NBFCs control nearly 81% given their extensive reach in terms of branch network. India is the worlds largest consumer of gold jewellery and possesses over 20,000 tonnes of gold valued at over US$800 billion; with rural India holding about 65% of the stock. However, technological advancements and the entry of new age banks, such as Small Finance Banks (SFBs), are changing the game by leveraging their presence in the remotest parts, investing in technologies to maximise accessibility and offering tailored schemes with flexible tenors.

Key growth enablers

Lower interest rates than unorganised lenders

High under-penetration of gold loans

Significant potential to monetise idle gold

Prompt disbursements, minimal documentations and flexible repayment options make gold loan an attractive option for short-term loans

Consumer durable loans

Consumer durable loans remained one of the fastest growing credit segments in the banking and financial services industry, recording almost 30% growth in FY 2018-19. The government and the industrys continued push for digitisation, as well as a higher financial inclusion, will likely keep consumer durable loan growth at elevated levels. With the entry of more NBFCs and new age banks, consumer durable financing received the much-needed boost in terms of speed and convenience, with paperless disbursements.

ABOUT AU SMALL FINANCE BANK

AU Small Finance Bank, a Fortune India 500 Company, is the only scheduled commercial bank headquartered at Jaipur, Rajasthan. We are redefining the banking ecosystem in India with enhanced convenience and uncomplicated banking experience for our customers.

Key highlights

Among the fastest growing banks in India

Extensive phygital presence in the regions where we operate

Experienced and highly qualified team

Comprehensive portfolio of products and services

Judicious investments in data, digital and distribution to build a future-ready bank

Focussed on secured retail lending and customer centricity

Profitable with stable asset quality

Sound business ethics and strong corporate governance standards

CHANNELS OF BANKING

REVISITING FY 2018-19

Financial highlight

Profit and loss summary

FY 2018-19 FY 2017- 18 y-o-y
Income
Interest earned (excluding securitisation and assignment income) 2,796 1,464 91.0%
Interest expended 1,606 827 94.3%
Net Interest Income (excluding securitisation and assignment) 1,190 637 86.7%
Securitisation and assignment income 153 303 -49.7%
Other income 462 388 19.1%
Total net income 1,805 1,329 35.8%
Expenses
Operating expenses
Employee cost 601 425 41.5%
Other operating expenses 481 328 46.9%
Operating profit before provisions and contingencies 722 576 25.3%
Provisions (other than tax) and contingencies 142 133 6.9%
Exceptional items - - 0.0%
Profit before tax 580 443 30.9%
Tax expenses 198 151 31.1%
Profit after tax 382 292 30.7%

Key ratios

FY 2018-19 FY 2017- 18
Net interest margin (NIM) 5.5 7.0
Net interest income (Excluding income from securitisation and assignment) as a % of average total assets 4.6 4.5
Total cost to average assets 4.2 5.3
Return on Average Total Assets (ROA) 1.5 2.0
Return on Average Total Equity (ROE) 14.0 13.7
Gross Non-Performing Assets (GNPA) 2.0 2.0
Net Non-Performing Assets (NNPA) 1.3 1.3

Our net interest income (excluding securitisation & assignment income) grew to 1,190 crore in FY 2018-19 from 637 crore in FY 2017-18. Securitisation & assignment income declined to 153 crore in FY 2018-19 from 303 crore in FY 2017-18 as our securitisation & assignment outstanding book is declining over the past two years given that we have not done much of securitisation/assignment in the last 2 years. Other income was up by 19.1% to 462 crore from 388 crore. Profit After Tax (PAT) grew by 30.7% to 382 crore from 292 crore.

For the first two quarters of FY 2018-19, average disbursement yield for new loans hovered around 13.2-13.4%. However, responding to external market conditions, we increased our rates from the third quarter and the trend continued in the last quarter as well. In Q4 FY 2018-19, blended disbursement yield for our new loans was around 14.6-14.7%. As on 31st March 2019, our full-year yield on our assets under management was at ~14.3%. Despite rising cost of funds in the second half of FY 2018-19, we improved our average cost of funds by nearly 50 basis points to 7.9% as on 31st March 2019. Our spreads at around 6.4% levels were stable in all four quarters. Our net interest income excluding securitisation/assignment income was also stable at around 4.8% in the last four quarters.

Cost-to-income ratio stood at 60% in FY 2018-19 from 56.7% in FY 2017-18. After peaking in the third quarter at 60.7%, the ratio improved to 58.3% for the quarter ended 31st March 2019.

There was a marginal improvement in our Return on Average Equity (ROAE) to 14% for FY 2018-19 from 13.7% for FY 2017-18. We continue to generate strong Return on Average Assets (ROAAs) in our existing business. However, our branch banking, which is in its build-out phase, was a drag on overall ROAA at 1.5% for FY 2018-19.

Our other asset products (business banking, gold loan, home loan, Agri-SME, consumer durables and two-wheelers) were introduced in the last few quarters and are gradually gaining volumes.

As our branch banking and new asset businesses scale, we expect our ROA to improve driven by higher productivity and operational efficiency.

Asset and liability composition

31st March, 2019 31st March, 2018 y-o-y
Liabilities
Capital 292 286 2.3%
Money received against Share Warrants 175 - N.A.
Employees stock options outstanding 43 17 145.4%
Reserves and surplus 2,653 1,978 34.1%
Deposits 19,422 7,923 145.1%
Borrowings 8,613 7,639 12.8%
Other liabilities and provisions 1,424 989 43.9%
Total liabilities 32,623 18,833 73.2%
Assets
Cash and balances with RBI 811 492 64.8%
Balances with banks and money at call and short notice 929 1,269 -26.8%
Investments 7,162 3,051 134.8%
Advances 22,819 13,312 71.4%
Fixed assets 447 386 15.8%
Other assets 455 323 41.0%
Total assets 32,623 18,833 73.2%

Our total balance sheet size grew 73.2% to 32,623 crore as on 31st March 2019 from 18,833 crore as on 31st March 2018.

Our assets under management (AUM) increased to 24,246 crore as at 31st March 2019 from 16,188 crore as at 31st March 2018, up by 50% y-o-y.

Total net advances grew 71.4% y-o-y to 22,819 crore from 13,312 crore, owing to satisfactory performance of our core products and a pickup in newly launched products.

Our asset quality remained stable on account of stringent monitoring and engagement. Gross NPA and Net NPA stood at 2% and 1.3% as on 31st March 2019 from 2% and 1.3%, respectively as on 31st March 2018.

Our capital to risk weighted asset ratio (CRAR) and Tier-I CRAR stood at 19.3% and 16%, respectively as on 31st March 2019 vis-a-vis 19.3% and 18.4%, respectively as on 31st March 2018.

BUSINESS REVIEW

We are among the new entrants in Indias dynamic banking landscape with a steady focus on growing the right way. With over 62% of our branches in rural and semi-urban areas, we have enhanced focus on unbanked and underbanked customers at the bottom of the pyramid to drive financial inclusion.

Vertical-wise performance

We have been a retail focussed bank with retail loan assets comprising over 80% of loan AUM. We also offer small & mid corporate loan asset products. Both these segments clocked strong growth in FY 2018-19.

Retail assets

For more than two decades, we have been lending small ticket, secured, retail loans primarily to the unbanked and the underbanked self-employed population and helping them improve their earnings and quality of life.

Within retail assets, vehicle loans, small secured business loans to MSME (SBL-MSME) are our two focussed products.

Breakup of retail assets

(%)
Type of retail asset Share in total AUM
Vehicle Loans 42.2%
SBL - MSME 31.8%
SBL-SME 3.7%
Gold Loan, Agri SME, Housing Loan, others 1.7%
OD Against FD 2.3%
Total 81.7%

As on 31st March 2019, 59% of our loan portfolio was upto 25 lakh.

Vehicle loan

Vehicle loans has been our mainstay retail product since our inception and is the most seasoned book in our portfolio. As of 31st March 2019, our vehicle loan AUM recorded a growth of 43% and stood at 10,224 crore comprising 42% of our total AUM. Wheels disbursements grew by 52% y-o-y to 6,725 crore in FY 2018-19.

Within vehicle loans, AU Bank offers one of the widest product range and extends credit for 2 to 22 wheel vehicles, for new vehicles as well as used vehicle, for personal use as well as commercial use.

We have been serving First-Time Buyers (FTBs), First-Time Users (FTUs), Small Road Transport Operators (SRTOs) and captive users. Our wheels loans are secured by the vehicles we finance.

We offer loans for new, pre-owned vehicles and for refinancing of vehicles across several categories including: (i) multi-utility vehicles (MUVs); (ii) cars; (iii) sports-utility vehicles (SUVs); (iv) small commercial vehicles (SCVs); (v) light commercial vehicles (LCVs); (vi) medium-and heavy-commercial vehicles (M&HCVs); (vii) tractors; (viii) three-wheelers (TWHs); (ix) two-wheelers (TWs); and (x) construction equipments (CEs).

During FY 2018-19; we launched a slew of initiatives such as:

Offered pre-approved loans to existing customers

Initiated School Connect programme where we target loans for school buses, along with offering a host of asset and liability products and refinance

Focussed strategy to tap the used car market in India

Empanelled tractor dealers for funding exchange vehicles

Launched a two-wheeler online loan module

Secured business loans - MSME (SBL-MSME)

Secured business loans MSME is our second mainstay product within retails assets and accounts for ~32% of our total AUM as on 31st March 2019.

We extend loans to various micro, small and medium enterprises (MSMEs) primarily for business expansion, working capital and purchase of equipment. Our typical customer base for this segment includes self-employed individuals with small businesses (annual turnover between 40 lakh and 10 crore), having at least a few years of track record in such businesses, generating cashflows at high frequency and having limited or no formal documented income proofs (for example grocery/kirana stores, dairy/ cattle rearing and hotel/restaurants). Such loans are then secured by immoveable property.

Gross AUMs for our SBL-MSME business increased 54% y-o-y to 7,708 crore as on 31st March 2019. SBL-MSME disbursements grew 35% y-o-y to 3,691 crore in FY 2018-19.

Secured business loans - SME (SBL-SME)

We offer business loans to small and medium enterprises (SMEs) for their expansion, working capital and purchase of equipment. Our SME customers have relatively bigger businesses in terms of turnover and have more formal documented income proofs. They include traders, wholesalers, distributors, retailers, manufacturers and self-employed professionals. Our approach for such customers is to understand their business loan requirements, estimate business cashflows, appraise documented income proofs and then determine their loan eligibility. These loans are secured by immoveable property.

Gross AUMs for our SBL-SME business marginally increased to 891 crore as on 31st March 2019 from 871 crore a year earlier. We continue to be cautious while pursuing new growth opportunities in this segment.

Agri business loans

We offer specially designed loans to cover a comprehensive set of requirements of all stakeholders under agri-allied activities and its value chain. While product features and approaches are similar to SBL-SME loans, we have set up a dedicated team to tap into credit needs of the agriculture and allied value chain such as food processing units, fertiliser/seeds wholesalers and retailers. Gross AUMs for our agri business loans increased substantially to 244 crore as on 31st March 2019 from 33 crore a year earlier; agri business loan disbursements grew more than 4.5 times to 277 crore.

Home loans

We provide a complete bouquet of services to customers to meet their home loan requirements, catering to self-construction, purchase of flat/house, extension/ renovation and takeover/top-up. Customers can easily apply for a loan with branches spread across India. Our relationship officers help customers in every step of their journey by helping them select the right loan mix, calculate a suitable loan EMI and tenure. We offer home loans from 2 lakh to above 50 lakh for a maximum 30-year tenure for salaried customers; and 20 years for self-employed non-income proof/self-employed income proof profile customers. Gross AUMs for our home loans business increased to 116 crore as on 31st March 2019 from just 2 crore a year earlier.

Gold loans

We offer instant gold loans across the table at many of our bank branches with attractive interest rates and repayment options. We provide a simplified banking experience for our gold loan customers and cover complete safety of collaterals with easy documentation and faster turnaround time (TAT). Gross AUMs for our gold loans business increased to 49 crore as on 31st March 2019 from 26 crore a year earlier; gold loan disbursements grew 128% year on year to 67 crore.

Small and mid-corporate assets

As on 31st March 2019, small and mid-corporate assets comprised ~17% of gross AUMs. In small and mid-corporate assets, we cater to small and medium enterprises for their business banking, working capital and trade finance needs. We also service Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), Micro Finance Institutions (MFIs) for onward lending and Real Estate Developer for construction finance.

Business banking

Business banking provides fund-based credit facilities such as overdraft and cash credit and non-fund based facilities such as letters of credit and bank guarantees to small and medium enterprise customers. We have increased presence in non-fund based credit facilities, along with trade and remittances. We cater to all segments of businesses including wholesalers, retailers, traders, manufacturers, service providers, contractors, stockist, distributors, educational institutes and healthcare enterprises. Gross AUMs for our business banking increased 88% year on year to 818 crore as on 31st March 2019; business banking disbursements grew 82% year on year to 925 crore.

Lending to NBFCs, HFCs and MFIs

Non-Banking Financial Companies (NBFCs), Housing Financial Companies (HFCs), Micro Finance Institutions (MFIs) and Asset Finance Companies (AFCs) need constant stream of funds for growth and expansion. After completing our journey as an NBFC and witnessing several credit and business cycles, we have gathered first-hand perspective and experience of their specific needs. With our customer-centric approach and customised product suite, we are well prepared to serve them at various stages in their business cycles.

Our lending in this segment is spread across diverse asset classes with a substantial proportion to asset finance companies (around 60%). Our book has granular spread across 140+ customers. Over 92% of our lending is Term Loans (mostly for two years and above). We have a robust verification methodology where we check assets, governance practices, capital and balance sheet strength, and promoter involvement. We focus on completely understanding all the above & other key parameters and once we are convinced, we start with small ticket size loans and gradually build upon it.

Gross AUMs for NBFC, HFC, MFI and AFC lending business increased by 65% to 2,511 crore as on 31st March 2019 from 1,525 crore a year earlier. Responding to macro headwinds facing the NBFC sector, we remained cautious in the second half of the previous fiscal. NBFC, HFC, MFI and AFC lending disbursements grew 27% year on year to 2,399 crore in FY 2018-19.

Real estate group (REG)

Real estate companies require a constant cash stream, right from the under-construction stage to the handover stage to ensure timely delivery of housing or commercial units. At AU Bank, we primarily serve credit requirements of small builders, who operate in affordable housing segment with smaller projects and target to complete the project between 18 months to 24 months. In this vertical, we typically do last mile funding towards project completion. Gross AUMs for this segments lending business rose to 801 crore as on 31st March 2019 from 779 crore as on 31st March 2018; disbursements in FY 2018-19 were at 440 crore versus 481 crore in FY 2017-18.

Liabilities and branch banking

As a bank, our objective is to be an integral part of our customers life by empowering them with financial products and services whenever they need. Today, we have 408 branches (including 86 banking outlets), along with 67 business correspondents, 83 asset centres, 14 offices and 543 ATMs across 11 states and a Union Territory. We have an entrenched contiguous distribution franchise addressing customers across Tier I to Tier VI regions with multiple financial products and services.

We offer an entire bouquet of deposit products, including Current Account, Savings Account, Term Deposits and Recurring Deposits. Total deposits grew 145.1% year on year to 19,422 crore in FY 2018-19; total number of deposit accounts increased 94% y-o-y to 10,28,726.

We are driving Savings Account (SA) opening digitally on tablets that offers Aadhar validation through biometric identification along with a printer. It enables our team to seamlessly open an account without any forms, documents or photographs. Currently, over 80% of our SAs are being opened every month through TABs. We are rolling out Current Account (CA) sourcing digitally on tablets as well. We increased thrust on the CA segment with a separate specialist team and have developed a specialised team for government business in Rajasthan, Punjab and Delhi.

During the year under review, we focussed significantly on building a granular retail deposit base. We are also increasing the share of retail in savings accounts and term deposits.

Deposit account mix

Financial year Current Account Savings Account Term Deposits Total deposits
FY 2017-18 392 1,742 5,790 7,923
FY 2018-19 1,082 2,508 15,832 19,422

Building granular retail deposit base

Financial year Current Account Savings Account Term Deposits Total deposits
FY 2017-18 22,838 4,50,204 58,020 5,31,062
FY 2018-19 47,783 8,73,031 1,07,912 10,28,726

Our branches cross-sell the entire bouquet of asset products. During FY 2018-19, our branches sourced 810 crore of asset products.

We are strongly focussing on building new avenues. During FY 2018-19, we did 1,539 trade and remittances transactions amounting to 425 crore.

We provide debit card offerings to our SA customers in collaboration with Visa and Rupay. We made locker facility available at 238 branches and marketed lockers during FY 2018-19. We successfully installed 2,200 Point-of-Sale (POS) machines.

We offer a wide basket of third-party products such as mutual funds (including SIPs), life insurance, health insurance, motor insurance, general insurance and fire insurance. As on 31st March 2019, our mutual fund AUMs stood at 42 crore. During FY 2018-19, we sourced 62,792 life insurance policies with premiums amounting to 132crore; 2,93,337 general insurance policies with premiums amounting to 120 crore and 30,229 health insurance policies with premiums amounting to 12 crore.

Recently, we received the RBIs approval for 142 new banking outlets. We have identified 27 key locations, including in Mumbai, Delhi and Pune for the first phase.

Digital bank

Digital banking plays a pivotal role in delivering banking services with ease, resulting in superior customer satisfaction. As a constantly evolving bank, we have been investing in our digital banking franchise. Our digital products and services will enhance customer convenience and delight and reduce our cost of acquiring customers and operating expenses, expand our reach and increase our revenue per customer. Our digital offerings include an instant Savings Account and consumer finance loan.

Instant Savings Account

We launched a new age instant Savings Account, AU ABHI. One can open an ABHI account by just downloading the AU ABHI App and registering using the Aadhaar number, PAN and other minimal details.

Savings Account opened via AU Abhi

FY 2018- FY 2018- FY 2018- FY 2018-
19 (Q1) 19 (Q2) 19 (Q3) 19 (Q4)
AU Abhi (Nos.) 219 5,072 5,322 5,313

Consumer finance loans

We offer consumer finance loans through a fully digital paperless platform. The entire loan is processed digitally either by sales personnel at the point of sale or by customers themselves, thereby reducing operational processes and costs. We also offer consumer durable loans in partnership with Snapmint, a digital platform, where we offer cashless Equal Monthly Instalment (EMI) options to customers purchasing consumer durables from various online retailers. Consumer finance loan disbursements through our digital platform grew from 8 crore to 16 crore in FY 2018-19.

FINANCIAL INCLUSION

We drive financial inclusion programmes across the remotest part of the markets that we serve in India. We enjoy wide market penetration and have a deep understanding of our markets, which enable us to create a platform for fostering financial inclusion.

At AU Bank, we have benefitted a million plus of underbanked and unbanked Indians with our financial inclusion initiatives. About 62% of our branches are in rural, semi-urban and unbanked rural (UBR) areas. We are participating in various financial inclusion initiatives such as the Pradhan Mantri Jan Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, RuPay cards, Pradhan Mantri Suraksha Bima Yojana.

We appointed 86 Banking Outlets (BOs) at 86 unbanked rural centres. We opened 33,619 accounts with a balance of 10.55 crore and disbursed 20.24 crore through these BOs in FY 2018-19. Aadhaar seeding is a process by which Aadhaar numbers of residents are included in the service delivery database of the Bank. This is useful for direct benefits transfer. We seeded ~54,000+ accounts as on 31st March 2019. We organised more than 300 financial literacy camps to provide comprehensive education regarding the benefits of formal banking to over 23,000+ people.

We intend to launch 1,000 ATMs under at the Atal Seva Kendra in the interiors of Rajasthan, of which 251 had commenced operations as on 31st March 2019.

TREASURY MANAGEMENT

Our treasury department is primarily responsible for asset liability management (ALM); effective fund planning and positioning; day-to-day liquidity and fund management; managing statutory reserves in adherence to and compliance of the statutory guidelines and judiciously managing investments and trading portfolio as per internal policy framework of the Bank. In addition, risk management is key focus for the Bank whereby market risk, funding risk, interest rate risk and liquidity related risks are effectively monitored and managed. The Treasury, along with Financial Institutions Group (FIG) maintains close interface with financial markets and participants for augmentation of counter-party lines for our Banks balance sheet management.

The treasury on a day-to-day basis focusses on fund management, compliance with regulatory requirements of Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Liquidity Coverage Ratio (LCR), and managing liquidity and interest rate risks. We maintain a portfolio of government securities, in line with the regulatory norms governing the SLR. SLR securities are primarily retained as Held to Maturity (HTM), while some portions are held as Available for Sale (AFS). We concentrate on optimising yield on the overall portfolio while maintaining an appropriate portfolio duration within the overall risk framework and under the oversight of our internal policy parameters.

Increasing proportion of deposits further diversifying the funding profile

Funding sources FY 2018-19 (Q1) FY 2018-19 (Q2) FY 2018-19 (Q3) FY 2018-19 (Q4)
Deposits + borrowings ( in crore) 16,874 20,699 23,508 28,036
Deposits (%) 59.3 62.2 62.4 69.3
Refinance from FIs (%) 22.4 23.2 22.7 18.6
NCDs(%) 14.3 9.6 8.5 6.1
Loans from Banks and NBFC (%) 1.9 1.7 1.2 0.8
Tier II capital (%) 1.5 1.1 3.1 2.6
CBLO*/line of credit/ inter-bank/others (%) 0.6 2.2 2.1 2.7
Total (%) 100 100 100 100

*Collateralised borrowing and lending obligation

Cost of funds trend

FY 2018-19 (Q1) FY 2018-19 (Q2) FY 2018-19 (Q3) FY 2018-19 (Q4)
7.9 7.8 7.9 8.0

Our incremental cost of funds stood at 7.65% in FY 2018-19 due to tight systemic liquidity. Our cost of deposits (excluding certificates of deposit) stood at 7.27%.

As on 31st March 2019, we maintained Statutory Liquidity Ratio (SLR) investments of 5,061 crore (versus requirement of 4,009 crore) in the form of government securities/ SDLs (held to maturity) and government securities/T-Bills (available for sale). There was no Mark-to-market (MTM) provision/loss during FY 2018-19 for both SLR and non-SLR portfolio. In FY 2018-19, we also maintained a healthy Liquidity Coverage Ratio (LCR) of more than 100%, well above the minimum requirement of 70% till December 2018 and 80% from 1st January 2019. We have built a profitable and high-quality non-SLR investment book of ~1,070 crore to offset negative carry on account of incremental cost of funds to maintain SLR and LCR.

Our treasury reported a profit of 6.9 crore in FY 2018-19.

Liquidity, interest rate and ALM management

We continue to maintain sufficient liquidity and contingency buffer in the wake of volatile markets. We have strengthened and diversified our liquidity profile in view of additional regulatory requirements through a mix of long-term deposit mobilisation and rupee borrowing in the form of re-finance from various domestic financial institutions.

The treasury closely works with the internal team and monitors deposit mobilisation and competitive landscape on interest rates to broad base the Banks deposit franchise. The treasury further optimises cost of funds to enable branches to mobilise deposits by offering competitive rates of interest, keeping in view the prevailing interest rate scenario.

In FY 2018-19, we established a desk for trading government bonds and highly rated money market instruments. We endeavour to generate trading surplus by prudently taking advantage of interest rate movements through proprietary positions at appropriate levels. During the year, the Bank also actively participated in Open Market Operations (OMO) bond buying programme of RBI and generated capital gains from SLR portfolio.

Our portfolios asset-liability profiles Structural Liquidity Statement (SLS) and Interest Rate Sensitivities (IRS) positions are efficiently monitored under the guidance of the Asset and Liability Management Committee (ALCO) and managed through investments and borrowings in appropriate buckets.

Debt Capital Market (DCM) Desk

During FY 2018-19, we started a DCM desk for investments in short-term and medium-term bonds and debentures, enhancing return on funds, as well as to create high-quality liquid assets to aid in regulatory LCR. DCM undertakes investments, origination and trading of bonds, and works closely with asset managers, insurance companies, other banks and market participants.

Update on Financial Institutions Group (FIG)

Financial Institutions Group (FIG) is responsible for managing overall relationships with various financial market participants such as banks, mutual funds, insurance companies, Development Finance Institutions (DFI) and multilaterals, as well as associates and intermediaries such as credit rating agencies, legal firms and stock exchanges. FIG also facilitates the raising of medium-term/long-term liability for AU Bank depending on our funding and ALM position. The group also helps in setting up fund-based and non-fund-based limits with various counter parties and market participants.

During the year under review, we continued to grow our relationships with banks and financial institutions in both private and public sectors through mutual counterparty limit set up for ensuring various inter-bank transactions and liquidity management.

We tied-up with various banks to ensure availability of trade and remittances products for our clients. We successfully facilitated inwardandoutwardforeigncurrency transactions, including issuances of trade instruments (letters of credit and bank guarantees) and processing of trade payments within the capacity of an AD-II category bank.

As part of liquidity management measures, we continued to enhance our relationship with domestic Development Financial Institutions (DFI) and availed long-term, low-cost refinance facilities under various schemes. This enabled us to continue providing long-term assistance to various underbanked and underserved customers in rural and semi-urban locations and improve ALM in these branches.

CREDIT MANAGEMENT

Credit underwriting is at the core of our frontline functions and plays an active role in portfolio building within the accepted risk appetite limit of the organisation. We have built a formidable credit team that uses in-house field investigation techniques to evaluate and analyse customers income and repayment ability. We have a robust and comprehensive credit assessment framework as a large proportion of our customers belong to the underserved segment of the society and are primarily first-time purchasers of financial products.

We have a separate credit team for each business vertical, which evaluates prospective customers business needs, identifies expansion plans and analyses their ability to repay. We have a three-layered system of assessment, which includes visits by credit officers, relationship officers and business officers to inspect the business and collateral quality.

Legal check and organised setup: We have a strong central legal team with experience and domain knowledge that facilitates both external and internal legal checks. We conduct two-level checks of title papers and legal reports and have enlisted legal persons across all states and branches.

Technical setup: We have a centralised technical team with experienced coordinators for both external and internal technical checks. We also have appointed valuers across all states and branches.

Risk Containment Unit (RCU): Our regional RCU teams conduct a detailed document verification and thorough check on several parameters before disbursing loans.

Post disbursal monitoring: We have put in place a post disbursal monitoring process to help maintain portfolio quality. This also helps our internal and external audit teams to ensure adherence to policy and improve the documentation process. The monitoring of working capital limits also falls under post disbursal monitoring and is being conducted regularly for all working capital products across the Bank.

COLLECTION MANAGEMENT

At AU Bank, collection management is one of the key functions ensuring our stable asset quality. Our collection management function is streamlined by key attributes such as geography, delinquency, products and customer repayment history.

We focus on regular customer engagement and emphasise Business-to-Employee (B2E) communication. We are focussing on capturing profile data of customers to ensure we develop a strong customer database. Our robust MIS and reporting ensure regular updates to management. Over 85% collection is in-house, which enables us to maintain superior asset quality. We have specialised partners in select metro and micro markets for bucket 1 and bucket 2 cases, which is an efficient model to manage efficiency and cost.

Collections Approach

We focus on inculcating a practice of proactive collections rather than reactive collections.

INFORMATION TECHNOLOGY

Our best-in-class technology enhances customer convenience and streamlines operations to reduce costs. Alongside our transition onto a banking platform, we underwent a major technology upgradation across different business lines and implemented modern hardware, software, risk management products and solutions commensurate to our size. This modern infrastructure will support our banking journey for the next few years.

Our core technology stack (CBS) is procured from Oracle Corporation and our other key systems include customer relationship management application, treasury application, expense management system, compliance and others encounter regular upgrades and integration.

Our technology infrastructure is a robust yet flexible architecture, which allows us to foster partnership with digital applications of other technology and IT partners.

We have strategically aligned our skilled workforce into three focussed IT sub verticals viz: Build the Bank, Run the Bank and Govern the Bank to ensure hassle-free banking for our customers and growth of our organisation.

We will continue to upgrade our technology systems with automated, digitised and other technology-enabled platforms and tools. A greater adoption of our digital service delivery mechanism and innovative applications will enable us to be more efficient and customer-friendly.

Information technology is a key tool, which can help us in delivering banking services to a broad spectrum of customers. During the year under review, we equipped our branches with paperless and faster customer onboarding processes across products.

During FY 2018-19, we worked on bringing banking to the fingertips of our customers by implementing login via fingerprint/PIN on AU Banks mobile app. The app was optimised to support multiple payments, scheduled payments, IMPS and other such features.

For our corporate customers, a new Corporate Internet Banking platform was launched. For further empowering our customers, we have integrated our systems with one of the largest payment gateway aggregator, CCAvenue; integration with other aggregators including Bill Desk is on the cards. This will help our customers to make payments to various merchants directly from their bank accounts.

During the year under review, we implemented Rupee Power, a paperless two-wheeler loan origination system, which enables us to process two-wheeler loans faster.

On one hand, we are focussing on implementing cutting-edge solutions in banking, on the other, we are concentrating on enhancing our systems stability and sustainability. Our disaster readiness has been tested in all scenarios to ensure there is no business disruption beyond the stipulated threshold.

Our business productivity and infrastructure optimisation efforts have resulted in dual network connectivity at most of our branches to maximise business uptime. Error free and rule-based automated computation of various banking charges are also live to enhance staff productivity.

Serving Indias vision of financial inclusion Aadhar Enabled Payment System (AEPS) on Micro ATMs and OFF US Card Transition have been implemented to serve the respective sector.

HUMAN RESOURCE

AU Bank has built a culture that is the key enabler for progress of our people and enrich their experience of working with us.

We have a well defined HR Structure and processes that focus on Talent Acquisition, Performance Mapping and Rewards & Recognitions. The focus for all HR Processes primarily has been around the three facets of Build, Connect and Reimage.

AU Bank offers the employees a wealth of opportunities to grow both professionally and personally while engaging with them consistently. The distinguished performances are recognised under the rewards framework. As a ready reference, during FY 2018-19, events were organised at overseas locations to celebrate the success of our people.

As part of Employee Connect and Engagement, Town Hall meetings and Regional Leaders Meet are regularly conducted.

We are also associated with Government of Indias Skill Development Programme for providing employment opportunities for youth in rural & semi-urban India.

Employees are granted ESOPs at AU Bank; this not only strengthens the pride and ownership but leads to inclusive growth for employees and the Bank.

As on 31st March 2019, the no. of employees employed were 12,623.

COMPLIANCE

At AU Bank, compliance starts at the top. Our Board of Directors and Audit Committee are responsible for overseeing the management of compliance risk and implementation of the compliance risk management framework across the organisation.

Compliance with the policies, rules and regulations are not just the responsibility of the specialist compliance staff, but is a shared responsibility of all AU Bank employees.

To build a compliance culture within the Bank, we promote awareness of compliance obligations and ethical values across the organisation. The key elements for building and maintaining a strong compliance culture in the organisation are as follows:

Leaders engagement: The Board and senior management actively participate, provide direction and vision within the defined compliance and risk management framework. We have a well-defined structure where the senior management is involved in monitoring operations of the Bank on an ongoing basis. We have various Board-level and Board-delegated committees where the Board members and the senior management are apprised of the current affairs of AU Bank.

Policies and procedures: We have a set of well-documented policies and procedures in place and operate within the framework defined by the regulator and the policies approved by the Board.

Monitoring: We have a robust monitoring framework in place. Audit, risk and compliance departments conduct regular reviews to ensure that our operations are within the defined framework. These functions ensure that we operate on the laid down/defined principles, guidelines and policies, thereby reducing risk and uncertainty through the establishment of sound governance mechanism and strong compliance culture. These three functions roll up to the Audit Committee and Board through managerial hierarchy.

Training: We ensure that employees are educated on our organisations internal policies and external regulations in a regular and influential way. We have a dedicated training department in place, which ensures that key information is supplied to all our employees. We have open communication channels as well where employees can approach various departments and senior management officials for guidance and resolution of their queries.

Technological support: We are a tech-led Bank, where we significantly rely on systems and technology. Controls are implemented at system levels to ensure that all transaction-based requirements/limits are adhered to. Systems and applications are used for monitoring transactions as well as for ensuring that post facto controls are in place.

Incident reporting and case management: Incident reporting and case management is an important aspect of our compliance programme to ensure that we can track and address any misconduct. Being aware of non-compliance is half the battle won, when it comes to mitigating risks. Through regular monitoring programme and system controls, we can identify any misconduct/noncompliance/ violation. We take appropriate action in all such cases.

We believe integrity, ethics and compliance are important, and it is reiterated to employees through policies and trainings. Ensuring that we have our finger on the pulse of changing laws and regulations helps us proactively steer the organisation in accordance with the requirements. Effective technology, and continuous education help set a positive and rewarding culture of compliance across the Bank.

INTERNAL CONTROL SYSTEMS

At AU Bank, our management is the first line of defence and is primarily responsible for ensuring adequate and effective internal control systems. Risk, Compliance and Internal Audit together form the governance function.

Internal audit is the third line of defence operating independently with functional reporting to the Audit Committee of the Board. It works in close conjunction with Risk and Compliance functions (second line of defence) to ensure a strong overall governance mechanism within the Bank.

To bring in more efficiencies and to eliminate duplication, Internal Audit and Risk and Compliance functions leverage each others work without compromising on the independence. This in turn results in better coordination and total assurance on all the important areas/processes/ functions of our Bank.

Our Internal Audit department evaluates business and controls risks of all business processes and branches to create a risk-based internal audit plan, aligned to the regulators expectations. This risk-based Internal Audit plan is approved by the Audit Committee

Our Internal Audit function performs independent and objective assessments. It monitors adequacy, effectiveness and adherence to internal controls, processes and procedures instituted by the management and extant regulations

Following RBIs guidelines, we have adopted a robust Internal Audit policy, which drives the conduct of risk-based internal audit (RBIA) across all auditable entities

The audit frequency of auditable units is aligned with the risk profile of each auditable unit

As part of audits, internal audit also provides process improvement recommendations to the management and the same is tracked/followed up for implementation

As part of meeting management expectations, in addition to the approved internal audit plan, internal audit also carries out certain management-advised audits based on specific areas/triggers identified and communicated by the management/senior leadership to internal audit

Moreover, the internal audit function conducts self-assessment of our internal financial controls, adequacy and operating effectiveness of such controls in terms of the Companies Act, 2013

Our Audit Committee is appointed by the Board of Directors and it assists the Board in reviewing auditing and accounting matters and risks related thereto. It assesses the robustness, adequacy and reliability of our internal control systems and provides assurance to stakeholders accordingly.

SWOT ANALYSIS Strengths

Our capabilities and resources that enable us to grow and sustain in the competitive banking landscape:

Established as a robust retail-focussed scheduled commercial bank with strong brand recognition in the markets we operate in

Offers a well-balanced product portfolio enabling us to penetrate different customer segments and helping us diversify our revenue streams

Extensive phyigital distribution network enabling efficient delivery of products and services to customers across urban, semi-urban and rural (Tier I to VI) centres

Strong technology architecture helping efficient and seamless operations

Led by experienced Board of Directors and leadership team

Weakness

Aspects of the business that needs to be improved to minimise risks in our business:

Four states (Rajasthan, Madhya Pradesh, Maharashtra and Gujarat) together account for ~80% of our loan book

Significant concentration of wheels in total loan assets

Opportunities

We are consistently identifying potential areas where we grow and enhance market and brand prominence:

Leveraging technology, along with doorstep servicing would enable us to rapidly gain market share

Significant exposure in underpenetrated regions offers strong growth potential

New retail products—gold loan, home loan, two-wheeler loan, agri-SME loan and consumer durable loan—hold immense growth potential

Scaling of third-party products (mutual funds, general insurance, health insurance and life insurance)

Threats

We are identifying potential threats to our business, owing to evolving macroeconomic factors and consumer perceptions:

Growing competition intensities from other banks and financial institutions

With several new banks, fintech companies and existing banks vying for the same talent pool, nurturing and retaining human capital may get difficult

Volatility in global or domestic economy and political uncertainty might hamper growth