BackSharp rise in NPAs forces DBS Bank to trim India loans business
Bank has changed its loan monitoring process and is avoiding lending to some sectors such as infrastructure
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Mumbai: DBS Bank Ltd, Singapore’s largest bank by assets, has slowed down its loan growth in India, changed its loan monitoring process and started avoiding lending to some sectors such as infrastructure as it recovers from a sharp rise in non-performing assets (NPAs) last fiscal.
However, the bank is confident the companies which faced a hard time due to the economic slowdown last year will return to better shape in the next couple of years as growth picks up, Sanjeev Lall, managing director, head, institutional banking group and branches, DBS India, said in an interview on 2 February.
DBS saw a sharp spike in NPAs in India in fiscal 2014 after a rapid growth in the past few years.
DBS Bank’s net NPAs rose to a record 10.21% in the year ended March 2014, up from just 2.37% in the previous fiscal. This percentage was the highest among all private commercial banks operating in India.
The rise in sticky assets forced the lender to increase provisions, leading to reduced profitability in its operations in India.
Lall said the main reason for the rise in NPAs was the challenging macroeconomic scenario.
“The number of accounts that went bad were a few, but given that our overall book was relatively small, the impact on the NPA ratio was magnified. Another reason is more technical because, according to our processes, we have to define even restructured loans as NPAs," Lall said.
DBS’s operations in India are younger, compared with its foreign banking peers, as it started through a representative office only in 1994; hence, its loan book is comparatively smaller.
DBS’s loan book in India has tripled to ₹ 15,155 crore in the five years between March 2010 to March 2014. It has since increased slightly to ₹ 16,804 crore as of September 2014, the Basel III disclosure on its website showed.
Net NPAs have eased slightly to 8.82%, disclosures on the bank’s website showed.
Lall declined to give any updated numbers for the bank’s operations in India, citing regulatory issues.
Lall said the bank has “worked with customers during the stress period to find an appropriate remedial solution".
“This (fiscal) year, our book will remain roughly the same, which means it will grow but not as quickly as it used to grow. We have gone slow on some businesses like infrastructure loans because the situation demanded that, but we can come back to those sectors whenever the situation improves," Lall said.
The rise in NPAs has led to the bank changing its loan monitoring process.
“While previously we used to monitor these accounts on a half-yearly or a yearly basis, we are now doing it on a monthly or quarterly basis," Lall said.
However, the bank has not given up on these loans because it is confident that these borrowers have a sound business model which will reap dividends when the macroeconomic environment improves.
“We are confident that these accounts will come back into a better shape in the next one or two years. With the improvement in the business environment, these firms will also change for the better, which will improve the condition of our exposure to them as well. These companies needed a little hand-holding which we gave them," Lall said.
However, recovery of an account from an NPA is a lengthy process riddled with uncertainties, said Saurabh Tripathi, partner and director at Boston Consulting Group (BCG).
“Most accounts slip into NPAs because of high debt. To come back to normal, many times, they have to restructure their balance sheets and sell some assets, which is not always possible. Besides, projects could become unviable in that period. All in all, total recovery is a lengthy process, which requires deleveraging," Tripathi said.
Lall, however, said he is “reasonably confident" that the Indian economy will change for the better in the next six months.
“Though so far the government has been lucky because of the lower oil prices, we think there is serious intent on changing things, too. We should see some improvement as the government policy takes shape on the ground in the next few months," Lall said.
DBS is also the only foreign bank which is keen on opening a local subsidiary in India after the Reserve Bank of India (RBI) released the guidelines in November 2013.
Lall said the bank is waiting to open more branches in India. “We are in touch with RBI to apply for local incorporation and hope to be in a position to apply soon. We have local subsidiaries in Taiwan, Hong Kong and Indonesia; so, that model is not different for us," he said.
A consultant who works with the bank to fine tune its strategy in India said DBS’ commitment to the country cannot be doubted despite the recent troubles.
“They can afford to be patient in India because their parent is well-capitalized. India is a growth market for the bank which prides itself on its Asia roots and after its aborted attempt to buy a bank in Indonesia, this is a very important market and on top of their wish list," this consultant said.
In August 2013, the Singaporean lender walked away from a bid to buy PT Bank Danamon in Indonesia over a year after it was announced, mainly due to regulatory hurdles.
It still operates its subsidiary, PT Bank DBS Indonesia, in that country.
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