DBS Bank shows it has the stomach for India

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Piyush Gupta, chief executive officer at DBS Group Holdings Ltd and DBS Bank Ltd, has the guts. His bank, Singapore’s largest, has moved the Reserve Bank of India (RBI) with a proposal for local incorporation even as its larger peers in India have been mulling over this for years now.

In 2005, for the first time, RBI laid down the road map for foreign banks in India. This was followed in 2011 by circulating a discussion paper on doubling their exposure to the Indian banking system. Finally, in 2013, it promised foreign banks a “near national” treatment when it comes to opening branches and also a nod to acquire local lenders if they convert their branches in India into wholly owned subsidiaries (WOS). However, all these promises have cut no ice with foreign banks in India.

DBS had started its operations in India, which now account for around 5% of DBS’s global loan book, through a representative office in 1994. It has 12 branches in India—the last was opened in 2010. Once locally incorporated, DBS plans to open 50-75 branches in the next three to five years. It wants to focus on small and medium enterprises (SMEs) in a big way and chase the retail market on a digital banking platform.

This is an audacious plan, considering the fact that its bad loans as a percentage of overall loan book rose to 10.20% in the fiscal year ending March 2014—up from 2.37% in the previous year—the highest among all private lenders in India, primarily because of aggressive lending to medium-sized companies.

As it had set aside Rs.516 crore to take care of bad loans, its profit dropped to Rs.2.24 crore last year from Rs.288.5 crore in the previous year. An unfazed Gupta sees big business opportunities in Asia’s third largest economy and wants to grab them by being locally incorporated. DBS’s loan book in India, at Rs.16,804 crore in September 2014, is less than one-fourth of Citibank NA’s loan book.

DBS has taken the plunge while other foreign banks remain fence-sitters. A few of them have even revised their India plans. For instance, UBS AG has surrendered its commercial banking licence, and Goldman Sachs Group Inc., which had applied for a banking licence, decided not to go ahead with its plans while Nomura Holdings Inc. has refrained from moving the regulator for a banking licence, contrary to its earlier plan.

In November 2013, RBI had said foreign banks with “complex structures” and banks that do not provide “adequate disclosure” in their home jurisdiction would have to compulsorily convert themselves into WOS of their parents in India. Besides, those foreign banks that become “systemically important” on account of their balance sheet size in India too would have to convert themselves into WOS. Systemically important banks are those whose assets account for at least 0.25% of the total assets of all commercial banks. However, those banks that started operations in India before August 2010 have the option to continue their business through the branch mode, even as they would be “incentivized” to follow the local incorporation route.

Under a 1997 World Trade Organization (WTO) agreement, RBI is required to give foreign banks 12 new permits to open branches every year, including those given to new entrants and existing lenders, but the Indian regulator has been liberal in its policy. Those foreign banks who decide to opt for the WOS structure will be able to expand their branch network like a local bank without seeking prior RBI approval “except in certain locations that are sensitive from the perspective of national security”.

Along with the freedom to open branches, the foreign banks will also be required to meet the so-called priority lending norms which makes it mandatory for a bank to lend 40% of loans to agriculture and weaker sections of the society.

Two key factors which have been holding the foreign banks from going the whole hog in India are the priority loan norms and tax liabilities that will arise out of local incorporation. Capital gains tax has been waived for conversion of foreign banks’ Indian branches into WOS while priority loan norms have been made mandatory for foreign and Indian banks alike. In fact, while fine-tuning the norms in April, RBI said even relatively smaller foreign banks with less than 20 branches in India will also have to lend 40% of their loans to the priority sector like any other commercial bank. The smaller foreign banks earlier exempted from this rule will now have to meet the norms from fiscal year 2021.

Broadbasing the priority sector basket, RBI has added new categories like medium enterprises, social infrastructure and renewable energy in addition to the existing ones—agriculture, micro and small enterprises, export credit, education and certain categories of housing. The distinction between direct and indirect agriculture has also been removed.

The changes in priority loan norms have encouraged DBS to bite the bullet. It’s a smart move as anyway DBS would have been required to meet the priority loan norms after five years. Following local incorporation, it will get a five-year grace period to meet priority loan norms and get the freedom to open new branches like a domestic bank.

I don’t have the latest data. Till March 2013, there were 43 foreign banks and collectively they had 334 branches, less than 0.33% of the branch network across the nation. Standard Chartered Bank Plc leads the pack with 100 branches, followed by Hong Kong and Shanghai Banking Corp. Ltd, or HSBC (50), Citibank (43), and Deutsche Bank AG (17). Foreign banks in India have 3.9% share of the total deposits in the banking system and 4.5% of advances.

Every foreign bank claims to see phenomenal growth opportunities in Asia’s third largest economy, but none seems to have the stomach of Gupta for India, at least till now.

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