Mumbai: DBS Bank Ltd will start focusing on small and medium enterprises in India, said Piyush Gupta, chief executive officer, in an interview. The former Citibanker said his bank is ready to incorporate locally even though there are certain issues on which it wants to seek clarifications from the Reserve Bank of India (RBI). Edited excerpts:
How important is India in DBS’s strategy?
Today, we are the largest bank in Singapore and in Southeast Asia with 60% of our business coming from Singapore and the rest from outside. To play the Asian game, you must be present in what I call the three axes of growth. You must have a greater China strategy, an India or South Asia strategy and a Southeast Asia strategy. Each of these regions have hundreds of millions of people, large GDPs and high growth rate.
Isn’t the rising competition from Asian peers posing a threat to DBS?
All the Asian-centered banks -- whether the Chinese,Korean, Taiwanese or Indian banks -- nobody has a footprint spanning across the three axes, as DBS does. ICICI Bank and State Bank are by and large India-centric. Since we are based out in Singapore, we can really intermediate the trade and capital flows into the region quite well.
Our Indian business has two agendas -- the growth in the country and the opportunity to intermediate the capital flows and trade between India and rest of Asia.
How do you see the new norms for foreign banks’play in India, especially the issue of local incorporation?
The guidelines allow near national treatment for foreign players, provided they are willing to subsidiarize in India. The need for local incorporation is important. It is a very clear evidence of one’s commitment (to the country) in the long term. One of the things about which regulators are concerned is the short-term nature of people’s interest.
Also, after the global financial crisis, there is indeed an effort to ring fence. Ring-fencing arrangement, for banks in particular, is broadly a global phenomenon.
Is DBS ready to incorporate locally in India?
Yes. Our interest is very clear. We are keen on subsidiarizing our operations.
What are your concerns in this regard?
There are two or three areas, which still remain uncertain and unanswered during the consultation process. Till a few months back, there was a conversation around the potential need for foreign banks to dilute the holding of the parent company even after the subsidiarization. That is something which is not there in these guidelines. It doesn’t say yes or no.
Our own understanding is that the dilution requirement might not be there. But it is something we need to make sure and reconfirm.
What is DBS’s strategy on stake dilution in a local subsidiary?
We are not comfortable diluting (our stake). In all other countries we operate -- China, Taiwan, Indonesia --there are no dilution requirements. We expect that Indian regulations will mirror the regulations of other countries. If you dilute shareholding, it tends to get a completely different complexion on your strategic agenda.
What are other major concerns?
There are clear regulations on priority sector lending, particularly agriculture sector --something we are trying to understand. For a bank like DBS, which is coming into the country and building our business, it is really difficult to reach out to farmers.
But RBI is talking about a five-year timeframe to achieve this.
Even with a five-year time, building out pure agriculture lending capabilities is not easy. We want to explore whether there are any other opportunities for us to participate in agricultural lending through schemes like rural bonds and agricultural bonds, which will make it possible for us to reach out to this segment without having to build a distribution network.
There are also tax implications. Is that a worry?
When we transfer our asset in branches into subsidiary, it could be counterproductive to have to pay tax to transfer your own business from one legal form to another legal form. That is one of the things on which we want to get clarity from RBI.
We are in the process of meeting RBI officials to make sure that we can voice our issues and concerns. We are a fairly large foreign bank in the country today. I’am pretty sure that the kind of questions we have, will mirror, in many ways, the questions of our peer group from around the world.
What’s your growth plan in India?
We are already in 12 cities, including six large cities. We found our operations in these cities quite good. Our interest would be to get 250 branches over the next three years. It allows us to change and evolve our strategy for India, which has so far been focused on high-end corporates.
Tell us more about your strategy.
We will now start focusing more on SMEs (small and medium enterprises). It’s an area where we are strong in other countries. In Hong Kong, China and Singapore, we have a very strong SME business.
We have not focused on the SME business in India, principally because the branch network was not big enough to cater to the SME requirement. We will now go and look for cities where we can expand our SME business.
Secondly, local incorporation also allows us to create a local currency-funding book. That is also something, which we were constrained (from doing)in the past. These are important shifts in our strategic capability, which we can now do on the back of new norms.
And, in terms of products?
We are strong in treasury management and project finance. We have done projects in Australia and Indonesia but not in India. But with a huge $1 trillion infrastructure need in the next five years, there are many opportunities in this space. Then, there is the wealth space and affluent banking and we have built a lot of core capabilities.
We are going to launch soon our premium credit card for the wealth segment, which will give you a whole range of discount and privileges to travel into Asia.
Aren’t you a late entrant?
We would not be able to catch up with banks in a hurry but I am very confident that we can build a substantial business in India which would be meaningful for us and be a material part of DBS’s global footprint, particularly when Indian companies look east towards China, Vietnam and Indonesia.
You called off your alliance with Cholamandalam group for consumer finance last year. Any plan to re-enter that space?
Out partnership with Chola focused on the unsecured space and as you know that space ran into trouble through two or three years because the infrastructure to support a credit-untested population is still not well developed. I agree that will continue to be a big opportunity but you need to see when it is the right time to get into this space. It all depends on how you want to allocate capital. Right now for us, building the SME franchise and other businesses is the best short-term viable use of capital and resource.
But RBI is not comfortable with foreign banks using the non-banking finance company (NBFC) route to lend.
That’s another issue, which you got to think about because NBFCs allow you distribution. You couldn’t distribute because you didn’t get freedom to open branches. But once that is levelled out, then you got to think about it. We are in the process of drafting a blueprint for our India expansion over the next five years in the backdrop of RBI provisions for the wholly owned subsidiary route.
The government and RBI have taken a cautious approach in opening up the financial sector to foreign players.
It’s imperative to start opening up a large part of the Indian economy. It has been demonstrated time and again that the economy gets a lot of benefits by opening up several sectors. It’s a national consideration but it’s not practical or possible for countries to throw open everything -- you have to adopt a gradual, phased and systematic liberalization.
In many countries such as Canada and New Zealand, opening up of the financial sector has proved to be extremely beneficial. But for developing countries, it may not be easy to do and even practical to do. At the same time, the fact that foreign banks and financial services have a meaningful role to play and can participate in the intermediation of trade and capital flows is something that governments need to recognize.
How confident are you on the India growth story, particularly in the context of high inflation?
You have to be secular and long term in your thinking. In the short term, there will be noises but you cannot be distracted by this noise. To me, the right question is whether India is a good bet in the long term and my answer is yes.
What are the key challenges?
In the short term, how would you balance growth and inflation is a question that has been troubling economists for 100 years.
If you have high growth, you are bound to have high inflation. It’s up to central banks and governments to manage this.