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Mumbai: DBS Bank Ltd, Singapore’s largest bank with $332.54 billion in assets, has applied to the Reserve Bank of India (RBI) to set up a local subsidiary in the country. This makes the Asian lender the first large foreign bank looking to do this, nearly one-and-a-half years after India’s banking regulator promised “near national" treatment to foreign banks if they open local subsidiaries in Asia’s third-largest economy.

The bank has previously said it would apply, and also disclosed that a process to do so was under way, but the application was finally made last month.

Piyush Gupta, chief executive officer (CEO) at DBS Group Holdings and DBS Bank, said the final application was submitted to RBI in April, including a plan to open about 50-75 branches over the next three to five years. The bank has 12 branches in India currently.

“We are optimistic that RBI will process the application speedily and are assuming it will take about a year to get a subsidiary in place. It will give us more cities and deeper business in segments like small and medium enterprises (SMEs), which we are good at. We will also scale up in consumer banking and explore possibilities in digital banking," said Gupta, adding that DBS would like to become a universal bank in India rather than restrict itself to corporate banking operations.

DBS is one of two banks that have put in applications for local subsidiaries.

SBM Bank (Mauritius) Ltd has also applied to open a local subsidiary, its acting India CEO C. Vasudevan said.

“The application was done through our head office in Mauritius so I cannot give you more details," Vasudevan said, adding that while the bank is currently focused on the mid-corporate segment, it may look to get into the retail banking business to service the large Indian diaspora in Mauritius.

More branches are a big attraction for foreign banks in India. Under a World Trade Organization (WTO) agreement, RBI is required to give a total of only 12 new permits to foreign banks to open branches every year. DBS, for instance, opened its last branch in India way back in 2010.

This would change if the foreign banks set up local subsidiaries, RBI promised as part of its guidelines on wholly owned subsidiaries in November 2013. Banks that do this would be given near national treatment in opening branches, as also in acquisitions of domestic lenders, it added. In return, the local operation of these banks would have to adhere to priority sector lending rules similar to those applicable to local lenders.

Indian banks have to mandatorily lend 40% of their net bank credit to borrowers in sectors such as agriculture or to small enterprises. In a recent revision to the norms, released last month, RBI expanded the scope of priority sector lending to include medium-sized enterprises, social infrastructure and renewable energy. The distinction between direct and indirect lending to agriculture was removed and export credit was added to the list, potentially giving foreign banks more room to fulfil their obligations.

Gupta termed the changes in priority sector norms “healthy" and added that concerns over tax implications of setting up a local subsidiary have also been addressed.

DBS’s operations in India are younger and smaller when compared with western banks such as Citibank NA and Standard Chartered Plc. It started through a representative office only in 1994. DBS’s loan book in India, at 16,804 crore as of September 2014, is much smaller compared with the 69,772 crore exposure of Citibank, which is the largest foreign bank in India in terms of assets.

At a group level, India represents about 5% of DBS’s global loan book.

The bank was also hit by bad loans after it expanded its portfolio rapidly in the 2010-14 period by lending to mid-sized companies. A chunk of these loans, particularly those to infrastructure-linked firms, went bad.

DBS’s net non-performing assets (NPAs) rose to a record 10.21% in the year ended March 2014, the highest among all private commercial banks operating in India. Net NPAs have since eased slightly to 8.82%, disclosures on the bank’s website showed.

Gupta said the NPAs were on account of the bank’s exposure to medium-size companies and challenges linked to the infrastructure sector, adding that the bank was not overly worried.

“We have already written off and cleared most of our portfolio. For a bank that earns $4 billion in a year, a $50 million write-off doesn’t really matter. For us, the bigger opportunity is in lending to SMEs and consumers, which most foreign banks don’t do. We are an Asian bank and India is important because it is among only two or three countries that matter," Gupta said.

DBS has invested 2,544 crore in India so far and the bank expects the amalgamation of the existing branches into a new Indian subsidiary to take place by the first quarter of 2016. The bank already has subsidiaries in Hong Kong, Taiwan, China and Indonesia.

In its new avatar, DBS intends to increase its lending to SMEs and also pursue the retail market, with a focus on digital banking.

“The change in digital is hitting banks like a tsunami and in the next decade some banks may not make it. With $2 billion of gross merchandise sales in e-commerce in India last quarter it’s a good time for banks to piggyback..." said Gupta, adding that some of the rules put in place for digital banking and e-governance in India are among the best in the world.

Saurabh Tripathi, partner and director at The Boston Consulting Group in India, said although going local ensures more branches for foreign banks, it also demands a greater commitment to the country from the lenders.

“This is a big bet for a foreign bank because it also means that it has to be committed to go out there and create business in India. It also demands the parking of some capital here. Asian banks are obviously taking the lead in this because they are in a much better position than their western peers," Tripathi added.

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