AU Small Finance Bank gets RBI approval to become a universal bank
New Delhi, Aug 7, 2025
AU Small Finance Bank becomes the first SFB to receive RBI's in-principle approval to transition into a universal bank, expanding its product reach and lending base
After over 11 years, the Reserve Bank of India (RBI) has approved an entity to become a universal bank as it granted in-principle approval to AU Small Finance Bank on Thursday. AU is the first SFB to get regulatory nod to become a universal bank.
AU is the largest small finance bank in the country by a distance with ₹2.40 trillion of total business, commanding about 40 per cent market share among SFBs.
In eight years as SFB, AU’s loan book swelled from ₹13, 413 crore (FY18), to ₹1.09 trillion while deposits went up from ₹7923 crore to ₹1.24 trillion.
In 2014, RBI had granted in-principle approval to Bandhan and IDFC (now IDFC First Bank) to operate as a universal bank.
“This in-principle approval acknowledges not just our ability to grow, but to grow responsibly,” said Sanjay Agarwal, MD & CEO, AU SFB.
“It is a testament to AU’s strength in reaching widely, integrity in serving wisely, and resilience to shine across economic cycles,” he added.
In April 2024, RBI laid out norms on the voluntary transition path for small finance banks into universal banks.
AU met all the eligibility criteria and applied for the conversion in September last year. Two more SFBs have also applied for such a conversion. They are Ujjivan SFB and Jana SFB. Applications are still pending with the regulator.
“This regulatory approval is a strong validation of AU’s robust business model, sound governance, and enduring commitment to financial inclusion. More importantly, it affirms AU’s evolution into a complete bank, one that offers a full spectrum of banking products and services,” AU said in a statement.
AU started its journey in 1996 when Sanjay Agarwal started his entrepreneurial journey in Jaipur, Rajasthan as a vehicle financing company for the underserved segment which was later transformed into a non-banking finance company - AU Financiers.
AU was the first batch of 10 entities to receive SFB license in 2015 and started as the small finance bank in 2017. Eight of the 10 entities that became SFBs were microfinance institutions. Only AU and Capital Local Area Bank were exceptions.
In April 2024, AU acquired another SFB, Bangaluru-based Fincare -- a first in the SFB space. Even after the acquisition, AU’s micro loan book was less than 10 per cent of the total book. At a time when the microfinance sector is facing multiple headwinds, a relatively smaller book augurs well for the to-be universal bank.
“What has worked in AU SFB’s favour is its scale and the relatively low share of unsecured loans in its portfolio,” said an analyst on the condition of anonymity.
“Going forward, the most significant change will be the removal of the 'Small Finance Bank' (SFB) tag, which will enable AU to lower its deposit costs. This, in turn, will allow the bank to operate in less risky asset classes, contributing to more stable profitability,” the person said.
Moreover, SFBs had to lend 60 per cent of their loan to the priority sector, which was 75 per cent till last financial year. AU’s PSL loans were 80 per cent. On the other banks, for universal banks, the mandate is 40 per cent. This free up funds for AU which could now be deployed in the mid-corporate lending segment, earning attractive yields in the range of around 12 per cent.
“With the SFB status no longer applicable, the priority sector lending (PSL) requirement will be reduced to 40 per cent, giving AU the flexibility to sell surplus PSL certificates,” said the person quoted above.
Furthermore, AU will now be able to service corporate clients and offer a wider bouquet of financial services. Overall, the transition opens up a host of new opportunities for AU Bank across both retail and corporate segments.
[The Business Standard]
