RBI Instructs AU Small Finance Bank Promoters to Move Holdings to NOFHC for Universal Banking Approval

The Reserve Bank has instructed AU Small Finance Bank's promoters, Sanjay Agarwal and family, to transfer their holdings to a non-operative financial holding company (NOFHC) before it approves the bank's transition to a universal bank. This move is aimed at ensuring the bank's stability and safeguarding depositors' funds.

Agarwal, who founded the bank and serves as its managing director and chief executive, stated that even as a universal bank, AU will not compete with larger banks. Instead, it will focus on competing with non-bank finance companies (NBFCs). The bank received in-principle approval to operate as a universal bank, which will enable it to access funds at lower costs and engage in larger lending activities.

Transitioning to Universal Banking

The transition to a universal bank is expected to bring significant changes for AU Small Finance Bank. Agarwal mentioned that the bank has been given 18 months to establish the NOFHC. This structure will provide greater flexibility for the bank to explore other financial ventures such as asset management or insurance if desired.

When questioned about the share transfer price and related tax implications, Agarwal acknowledged that there are certain mechanics to be resolved during this process. He expressed his intention to complete these tasks before the 18-month deadline.

Regulatory Requirements and Future Plans

HR Khan, AU's non-executive chairman and former Deputy Governor of the RBI, explained that establishing an NOFHC is crucial for protecting the bank from potential issues. This measure ensures that depositors' money remains secure. Uttam Tibrewal, AU's deputy chief executive and executive director, recalled that in 2016, the RBI introduced regulations for NOFHC-based sectors. He added that all future universal banks must adhere to these guidelines.

Agarwal clarified that he does not intend to increase his stake beyond the current 22% in the venture, which was incorporated in 1996. The bank started as a direct selling agent, evolved into a non-bank lender, became a small finance bank (SFB), and now has secured approval to operate as a universal bank—the first entity in over ten years to achieve this milestone.

Focus on Retail Lending

Despite becoming a universal bank, AU plans to maintain its focus on smaller-ticket retail loans rather than pursuing large-scale lending. Currently, retail loans constitute 80% of its Rs 1.17 lakh crore loan book. Agarwal stated that there will be no changes in business strategies for at least three to five years.

The bank intends to rebrand itself as AU Bank by April 2027, dropping the SFB mention from its name. Agarwal noted that the small finance bank label makes people cautious, and this change aims to present the institution in a new light as it embarks on its journey as a universal lender.

With inputs from PTI