Customers use automated teller machines (ATM) at the DBS Group Holdings Ltd. flagship bank branch in Singapore. (Photographer: Ore Huiying/Bloomberg)

DBS To Dial Up Retail And SME Lending As It Prepares To Subsidiarise In India

DBS Bank, now just a few months away from becoming the first major international bank to set up a wholly owned subsidiary in India, will increase lending to retail and small and medium enterprises as it tries to rebalance its books away from corporate loans.

The bank won’t shun lending to large corporations but would like to see risk priced more appropriately in this segment to ensure adequate returns, Piyush Gupta, chief executive officer of DBS Bank, told BloombergQuint in an interview.

Across most markets, DBS’ loan book consists of 50 percent in retail loans, 20 percent in SME loans and the remaining 30 percent in corporate loans. “In India, we are 70 percent large corporate. So, this is not consistent with our profile in other parts of the world,” Gupta said.

Besides, the higher reliance on large corporate loans has not paid off for DBS. Like its Indian peers, DBS too has seen corporate delinquencies rise. By March 2014, DBS had seen its gross bad loans rise to 13.45 percent. What followed was a period of cleaning up the book. According to the bank’s Basel 3 disclosures for September 2017, its gross non-performing assets from the India business now stand at 4.3 percent.

As long-term investors, DBS recognises that lending cycles come with their ups and downs, said Gupta.

This is not different from other emerging market stories. The reason why emerging markets are called so is because they go through these cycles. And you have to go through the process of clean-up.
Piyush Gupta, MD & CEO, DBS Bank
DBS To Dial Up Retail And SME Lending As It Prepares To Subsidiarise In India

Last September, DBS got an in-principle approval from the Reserve Bank of India to set up a wholly owned subsidiary in India. The process should be completed by September this year, said Gupta. Once done, DBS will be on par with local competitors and restrictions on branch expansion will ease.

Offline expansion will go along with DBS’ strategy of setting up a digital bank, said Gupta adding that this will allow them to gain a stronger foothold in the market for retail and SME lending.

To do SME and retail, you need to have presence. You need to be able to distribute. Part of the answer is in digital but digital can’t stand by itself in a country like India. So, you have to support online with offline. Our hope is that post subsidiarisation, we can do it. 
Piyush Gupta, MD & CEO, DBS Bank

Gupta argues that there is significant opportunity in retail and SME lending despite the fact that most lenders are now focused on these segments. According to him, the surge in the availability of data around these potential borrowers has opened up new opportunities.

The increased data is making a larger proportion of retail and SME clients more bankable. According to the MSME Pulse Report by TransUnion CIBIL and SIDBI, credit to the SME segment grew by nearly 13 percent between March 2017 and March 2018. This is higher than the growth in large corporate advances. Incidence of bad loans in the MSME segment is also below that seen across large corporate loans.

Could this change if the economy were to go through a downturn?

Yes, said Gupta acknowledging that both retail and SME lending tend to be highly correlated with GDP cycles. At some stage, GDP growth will fall and there will be a lift in delinquencies and provisions, he said. “If you want to play in the market, you must be willing to go through cycles.”

DBS, which has strength in project lending across Asia, will not completely ignore it in India either. However, the bank would like to see greater predictability in policies and better structured projects.

We are beginning to see some policy continuity. Mr [Piyush] Goyal made the point that there will be no policy reversals by the new administration...But the reality is that markets look at a much longer track record. So, you have to see 2-3 regime changes and consistency over several regime changes for the market to rely purely on track record.
Piyush Gupta, MD & CEO, DBS Bank

Commenting on the surge in bad loans across Indian banks and the more recent concerns around governance, Gupta said that some of these issues are cyclical, while others are self-created.

Also read: Banks’ Gross Bad Loans May Rise To Over 12% In FY19: RBI’s Financial Stability Report

While unseen risks in the infrastructure sector is one reason behind the increased bad loans, the asset quality concerns are also reflective of the lack of adequate “independence and independent judgement particularly in respect of credit, especially in public sector,” Gupta said.

As for governance concerns emerging in certain corners of the banking sector, those are symptomatic of bigger malaise, said Gupta.

These are symptomatic of a bigger malaise in the entire system and in the entire subcontinent where the sense of good corporate governance has not taken root as much as it needs to. But this is not dissimilar to other economies.
Piyush Gupta, MD & CEO, DBS Bank

Watch the full interview here: