AU Small Finance Bank rules out further hike in interest rates on deposits

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Jaipur-based AU Small Finance Bank (AU SFB), the largest lender in the small finance bank space, has ruled out any further increase in interest rates on deposits, given the complete pass-through of the repo rate hike.


The lending rates on the microfinance portfolio of Fincare Small Finance Bank (Fincare SFB) at 25 per cent also are not high and they reflect high operating costs and default risk, Sanjay Agarwal, managing director & chief executive, AU SFB told Business Standard. Fincare SFB is slated to merge with AU SFB on April 1, 2024.


The interest rates have already peaked and the entire transition has happened after the Reserve Bank of India (RBI) increased the policy repo rate by 250 basis points, he said, adding that deposits that were being raised at six per cent two years ago are priced at 8.5 per cent. 


There is a huge competition for deposits. But the bank is managing it nicely with 25 per cent year-on-year growth. The cost of money is very high and the bank needs to do more hard work on the ground, he said. The bank offers 7.25 per cent rate on savings deposits.


The business of the combined entity (AU SFB plus Fincare SFB) on a pro-forma basis consisted of deposits worth Rs 89,854 crore and gross advances worth Rs 79,565 crore as of December 2023. The combined balance sheet is expected to be Rs 1.2 trillion as of the end of March 2024, according to AU SFB’s estimates.


However, the situation on the loan side is different. Still, some transition has to happen (for lending rates) and that is why the growth is a little high. This year there will be an entire transition of incremental costs to the end borrowers. Only then, the credit growth can be a little bit arrested, Agarwal said.


“I strongly believe that post-elections there will be more focus on growth and inflation will be range-bound. Also, a policy rate cut by the RBI is likely to happen after August and we will do necessary things at our end also,” Agarwal said. 


About RBI’s concerns over unsecured credit, he said, it was not limited to any product.


Generally, they are worried about inflation and its control. They believe that the credit growth is beyond their comfort zone. They are more concerned about unsecured lending, he said. 


“We remain very rational in our growth rate and remain responsible in our disbursements and building portfolio,” Agarwal said. 

First Published: Mar 08 2024 | 8:48 PM IST