India has finally allowed foreign banks to operate wholly-owned subsidiaries (WOS) in the country.
The Reserve Bank of India had issued the guidelines for this in November 2013. However, it took about four years for the central bank to provide in-principle approval to two foreign banks, Mauritius’s SBM and Singapore’s DBS Bank, to set up WOSs. These lenders will now be treated at par with Indian banks, and will have no restrictions in opening new branches and expanding their business.
Meanwhile, despite its advantages, the subsidiary route hasn’t found too many takers.
One of the primary concerns was meeting the priority sector lending (PSL) targets that could put balance sheets under pressure. PSL includes small loans of up to Rs15 crore to sectors such as agriculture, micro and small enterprises (MSE), affordable housing, renewable energy etc. At present, foreign banks with less than 20 branches must set aside 32% of their loans for PSL. For local subsidiares, this requirement goes up to 40%.
Yet, Piyush Gupta, group chief executive officer of DBS Bank, believes the long-term potential of Indian banking makes them confident. The lender wants to expand from the 12 branches now to about 80 in less than five years.
Gupta spoke to Quartz on the bank’s plans and the evolving Indian banking landscape. Edited excerpts:
Several large foreign lenders have decided to not convert into a local subsidiary. Why have you gone ahead with the plan?
In most markets that we operate in, we operate through a subsidiary. Therefore, the corporate governance issue around subsidiary management is something that we are generally more comfortable with, as compared to many other players. Secondly…Many of the global competitors are pulling back because of the current cycle…(where) there have been slowdowns and some headwinds. However, we are long-term bullish on India. The prospects are extremely positive in the next five-15 years time frame.
One of the key reasons stated by other banks for staying away was meeting the stricter PSL norms. Is that not a concern for you?
Yes, the PSL requirements are somewhat more onerous. But some part of it can be achieved from the SME business that we will focus on. The bigger challenge is the agricultural component of the PSL norms. We do have some experience around that. So we will be able to build something that is economically rational. There could be some pressure on the books in the coming years, so we have to be mindful of that as we grow.
Apart from profitability, there are concerns over competition from niche banks.
As compared to other countries, it isn’t as bad. Everyone has to play to their own competitive strength. We believe there is a huge transformation going on in our industry, led by digitisation. And that’s one area where we stand out.
The Indian banking space is also battling bad loans. How long will it take for the issue to resolve?
I think there is still going to be headwinds for the next couple of years. The recent introduction of the bankruptcy code and RBI’s recent stand are helpful, but at the end of the day, the pain still needs to be taken at a systemic level.
We’re going to see more foreign banks coming into India. What does it mean for Indian banking?
Overall the banking sector in India is still relatively small. If you look at the largest bank in India, the State Bank of India, its very tiny as compared to banks in other parts of the world, including in China. So I think there is a tremendous opportunity for the sector in India to scale up, and you will see a lot more of that in the coming years.