Banking News

AU Small Finance Bank plans entry into microfinance business, acquisition may bolster the plan


AU Small Finance Bank, which started its banking journey six summers ago with 95% secured loan assets and without any microfinance lineage, has now decided to explore the so-called bottom of the pyramid customer segment.

The lender, while planning its own microfinance loan product, is also said to be exploring the acquisition route which would help it with a ready microfinance platform.

“We remain open to the idea of inorganic growth,” executive director Uttam Tibrewal told ET, adding : “However, I can’t comment on any media reports that suggest we are in discussion with somebody for a merger. We discuss so many things at our small finance bank forum.”

Microfinance contributes a little over three-fourth of Fincare’s outstanding portfolio of Rs 7600 crore.
The management of AU believes that foraying into microfinance, which is essentially offering small loans to the economically weaker and largely under-banked customers without collateral, is a natural extension of its business strategy.Tibrewal said that about 70% of AU’s lending is into the semi-urban and rural areas with over 90% priority sector portfolio. About 30% of its banking touchpoints are in unbanked rural areas. The bank has 1038 banking touchpoints overall including 476 branches. “Therefore, getting into microfinance is a natural progression of our journey,” he added.”Microfinance is a settled product now. We have a stable deposit flow to explore this segment,” he said.Unsecured microfinance loans are typically known for high returns and robust loan repayment behaviour by borrowers. The interest rate on loans now hovers between 22% and 26%, while the sectoral repayment rates returned to the 98-99% levels after the blip during Covid period.

“We are building a microfinance product internally,” said Shoorveer Singh Shekhawat, head of swadesh banking, government business and wholesale deposits.

Microfinance will be part of AU’s “swadesh banking” initiative, which aims to drive organisational efficiency and targeted attention to its semi-urban and rural businesses. The bank is building a dedicated team for this initiative.

The bank’s gross advances stood at Rs 63,635 crore at the end of June with vehicle loans accounting for 33% of it. The secured business loans, that is loans to small entrepreneurs such as kirana shop owners, account for 30% while commercial banking loans which include working capital to business units, agriculture loans and loans to MSME contributes 21% of the loan portfolio. The bank also offers home loans, personal loans and gold loans under retail business. The bank has also started offering credit cards.


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