How AU Small Finance Bank’s Sanjay Agarwal passed RBI’s muster
Chartered accountant Sanjay Agarwal, who began lending to small businesses in Rajasthan in 1996, has won RBI’s first universal bank licence in nearly a decade—cracking a mysterious test and beating other big names.
Mumbai: Sanjay Agarwal, the latest winner of the central bank’s rare universal bank licence, may have inadvertently ticked the right boxes on his path to glory.
On Thursday, the Reserve Bank of India issued an ‘in-principle’ approval for Agarwal’s AU Small Finance Bank to transition into a universal bank, making it the first full-fledged banking licence issued in nearly a decade.
The licence positions AU Small Finance Bank on par with India’s biggest lenders while handing Agarwal a sought-after calling card as a banker.
AU Small Finance Bank, which was founded as a non-bank in 1996 and converted into a small finance bank in 2017, applied to RBI for a universal bank licence in September 2024.
Its licence is only the fifth to be granted this century—Kotak Mahindra Bank secured the licence in 2003, followed by Yes Bank in 2004, and Bandhan Bank and IDFC Bank in 2015.It’s also the first since RBI began allowing continuous applications for universal bank licences in 2016 under its ‘on-tap’ guidelines, instead of in phases.
Agarwal has succeeded where Flipkart co-founder Sachin Bansal and Indiabulls failed to make the cut.
Those aware of the rigorous process involved will tell you it’s easier to milk a bull than get a bank licence out of RBI. Though entrepreneurs seeking a universal bank licence are required to have ₹1,000 crore in hard cash as capital, the regulator abhors entrepreneurs who flaunt money.
Also in RBI’s negative list are those who exert political or other pressures for a lenient consideration of their application.
Entrepreneurs seeking the licence have to bare their finances to the bone, and RBI’s forensic scrutiny can be excruciating. A retired RBI deputy governor recounted that a non-banking financial company had hid its promoters’ overseas real estate transactions that were done through shell companies. RBI rejected the application.
Banker to the poor
RBI never offers an explanation for rejecting an application. But the previous two universal bank licences issued show RBI’s preference for entrepreneurs enabling a path for money to reach the hands of those who have little of it. In RBI speak: reaching out to the ‘unbanked’.
Better still if the unbanked who receive money put it to good use to generate more economic activity. The caveat: the entire process should be conducted with some conscience. India has an estimated 190 million without access to formal finance.
RBI issued a universal bank licence to Kolkata-headquartered Bandhan Bank primarily because its founder, Chandra Shekhar Ghosh, grew his business by giving loans to those who would never qualify for credit in eastern India.
Agarwal’s story is similar, having built a credible lending business from Jaipur, Rajasthan and steadily expanding it across India over more than two decades.
Agarwal, a chartered accountant, started his non-banking finance company as he found few avenues for lending to small businesses in Rajasthan. The state is known for its craftsmanship and tourism—industries that drive small businesses—but Agarwal noticed a dearth in the understanding of credit worthiness. He decided to fill the gap.
Over the next decade, the blue and white branding of his non-bank, AU Financier, started appearing across the state. Agarwal’s ideas weren’t new. He borrowed a leaf from Chennai-based Shriram Group to build a lending business for buying used vehicles. By 2012-13, AU Financier had notched up a loan book of ₹3,704 crore.
The transitioning
Agarwal familiarised himself with India’s banking system early on, which may have won him some brownie points with RBI. He knew banks offered the cheapest source of funds, especially nationalised ones, and that they were happy to lend to other lenders who gave loans to the priority sector.
RBI mandates that every bank lend a small percentage of their loans compulsorily to priority sectors such as agriculture and micro, small and medium enterprises.
By design, Agarwal focused on lending to priority sectors to secure cheap capital from public sector banks. AU Financiers’s lending rates were highly competitive, and it helped the public sector banks it borrowed from achieve their priority sector lending targets—all with RBI’s knowledge.
After Agarwal got a small finance bank licence in 2015, he kept at what he was doing. His branch network expanded but the new ones came up in smaller cities and towns. In any case, RBI requires small finance banks to have a quarter of their branches in rural areas.
If Agarwal did open a branch in a high rent tony neighbourhood, it would be a small outlet meant to garner deposits. Not being opulent in large cities allowed AU Small Finance Bank to retain its image as a bank for the underserved in the eyes of the central bank.
On the financial front too, there were no surprises. AU Small Finance Bank’s income and profit grew at a steady pace, with the lender largely operating in the microfinance sector that often saw increased scrutiny from RBI.
That played a role in passing the regulator’s consistency test, which requires five years of good performance as a small finance bank before being considered for a universal bank licence.
By default or maybe by design, Agarwal may have just got it right with RBI.
topics
