AU Small Finance Bank has received a credit rating reaffirmation from ICRA Limited, with the rating agency maintaining its [ICRA] AA; Stable outlook for the bank's Tier-II Bonds. The development was communicated to stock exchanges on February 26, 2026, highlighting the bank's strong financial fundamentals and growth prospects.

Rating Action Summary

ICRA Limited has taken a dual approach in its latest rating action for AU Small Finance Bank's Basel II Lower Tier II bonds:

The rating withdrawal for Rs. 856.00 crore bonds was executed at the bank's request as the instrument has been redeemed with no outstanding amount, following ICRA's policy on credit rating withdrawal.

Strong Financial Performance and Growth Trajectory

The rating reaffirmation is supported by AU Small Finance Bank's robust financial metrics and consistent growth momentum. The bank has demonstrated impressive expansion with a compound annual growth rate of around 30% in its gross loan portfolio during March 2020 to March 2025, reaching Rs. 1,29,898 crore as on December 31, 2025. Deposits increased by 37% during this period, reflecting strong customer confidence and market penetration.

Universal Bank Transition and Strategic Positioning

A significant development supporting the positive rating outlook is AU Small Finance Bank's receipt of in-principle approval from the Reserve Bank of India to transition into a Universal Bank. This transition, expected to be completed in FY2027, positions the bank advantageously in the competitive banking landscape. The bank maintains its focus on secured retail loans, which comprised 68% of the gross loan portfolio as on December 31, 2025.

The bank's established market presence spans across 2,726 touchpoints in 21 states and 4 Union Territories as on December 31, 2025. Vehicle financing and mortgage-backed micro business loans continue to dominate the retail asset portfolio, accounting for 34% and 26% respectively of the gross loan portfolio as of December 2025.

Asset Quality and Capital Adequacy

While gross non-performing assets increased to 2.3% as on December 31, 2025 from 1.7% as on March 31, 2024, primarily due to stress in microfinance and digital unsecured business segments, the overall asset quality remains comfortable with net NPAs at 0.9%. The bank's capital adequacy ratio of 19.0% (Tier I: 17.1%) as on December 31, 2025, remains well above regulatory requirements of 15.0% (Tier I: 7.5%).

Regulatory Development and Risk Factors

The rating agency noted the bank's de-empanelment for Government business in Haryana following suspected unauthorised transactions. This development will result in deposit outflow of Rs. 735 crore, though this represents only 0.4% of the bank's overall deposits as on December 31, 2025, making it non-material to overall operations.

The Stable outlook reflects ICRA's expectation that AU Small Finance Bank will sustain steady credit profile while expanding operations and maintaining healthy profitability and adequate capitalisation. The bank is expected to maintain growth momentum with gross loan portfolio scaling at 20-25% per annum over the medium term.

AU Small Finance Bank has issued a comprehensive official press release under Regulation 30 of SEBI Listing Regulations, providing detailed clarification on media reports regarding its de-empanelment by the Haryana government. The bank's statement, released on February 22, 2026, addresses investor queries and clarifies the institution's position on suspected fraudulent activities involving another private sector bank.

Regulatory Compliance and Official Communication

The bank submitted the press release to both National Stock Exchange of India Ltd. (NSE Symbol: AUBANK) and BSE Limited under multiple scrip codes including 540611, 974093, 974094, 974095, 974914, 974963, 975017, 975038, and 976580. Company Secretary and Compliance Officer Manmohan Parnami digitally signed the official communication on February 22, 2026, ensuring full regulatory compliance and transparency with stakeholders.

Timeline of Events and Government Communications

The chronology reveals a rapid sequence of developments that led to the de-empanelment decision:

Detailed Transaction Analysis

The bank's internal review revealed specific transaction patterns in the government account that have been fully documented and submitted to authorities:

The bank emphasized that all 14 transactions totaling ₹47.00 crores were initiated by the concerned government department with proper authorization and executed in accordance with instructions provided by the department in the normal course of business. The additional ₹47.00 crores originated from another private sector bank that recently disclosed unauthorized and suspected fraudulent activities.

Impact Assessment and Current Status

The de-empanelment has resulted in a measurable reduction in government deposits from Haryana:

Governance Measures and Bank Response

Based on available facts and preliminary review, the bank confirms no indication of financial impact or fraudulent activity toward the institution. The board of directors has been informed, and the bank continues its internal review process. To ensure fair and transparent review, certain employees have been placed off-duty.

The bank maintains complete audit trails including account opening forms, KYC documentation, transaction instructions, verification call details, and supporting records, all submitted to the concerned government department. AU Small Finance Bank is actively engaging with the Haryana government to assess de-empanelment reasons and explore re-empanelment possibilities.

Bank Profile and Financial Position

As of December 31, 2025, AU Small Finance Bank operates over 2,726 banking touchpoints across 21 states and 4 union territories, serving more than 1.25 crore customers with a workforce of 59,800+ employees. The bank maintains strong financial metrics:

The bank has received in-principle approval from RBI to transition to a Universal Bank and is rated 'AA/Stable' by CRISIL Ratings, ICRA Ltd., CARE Ratings, and India Ratings.