Gold Silver Reports — PSU Banks Will Need Foreign Funds for Re-Capitalisation — As the head of Singapore’s DBS Bank, Piyush Gupta has a bird’s view of the happenings in the Asian region. With the recent burst of reforms like the Goods and Services Tax, India is beginning to deliver on its promise, Gupta tells Saikat Das in an interview.
You were among the few CEOs who was betting big on India a few years ago. How good is the progress card?
We had an ambitious plan in 2010 for what we would do with India on the back of the macro-environment which meant both the liquidity and interest rate cycle. Like the rest of the system, we stubbed our toes a little bit. The good news is that we were quick to recognise the issue and deal with our problems. So, remember in 2014, we had the highest NPL in the system at 10% and people questioned it and I just said we have been quicker to recognise it and it is going to hit everybody else. In 2015, we had a negative period and we wrote off whatever we needed to write off. So this year we turned around and showed a small profit.
But how about India as a market do business?
We see India at a cusp of a meaningful turnaround. The macroaggregates are much better with low oil prices and fiscal and current account deficits under control. From an external view, India continues to be an exception to the global environment. There is a degree of optimism about the resiliency in the system. But in our own engagement with our clients, we see that the momentum is coming back. So we are beginning to see more customer activity both at the top end of the market. In our clients, many of whom were skeptical about `acche din’ in the last 6-10 months, the tune is changing.
So is that true for your corporate clients?
I am talking about our large corporate clients. On the SME, space we are still being a little watchful. Our consumer business is also looking positive. Recent reforms, whether it is GST or FDI, or whether it is a slew of other government initiatives, we are beginning to see some positive impact from that trickle down. We are also very pleased with the first four months of our Digibank. We have about 2,50,000 customers in the first four months which is tracking because the customer numbers are increasing every month. We are on track in terms of customer targets.It’s still lower than our original models but the monthly increase we are seeing is fairly promising.
When we started, our general assumption was that we will have higher-end customers who have smartphones. But as the smartphone cost is going down so rapidly, we are beginning to get much deeper penetration than we originally expected. For us, the cost of customer acquisition and margin is not that high.
What is the status of the subsidiary licence that you had applied for?
The status is the same but we are encouraged. There are three, four banks who have applied and nobody got approval because the RBI and the ministry of finance have spent the whole year trying to come to an understanding on how to deal with these applications. As best as we can tell now, they have come to some understanding and agreement. So the process is now beginning to move, we will see some positive outcome coming from that fairly soon.
You have had high bad loans in the past. What are the things that you won’t do repeat…
The key learning is the concentration risk in the EPC (engineering, procurement and construction) sector. We were part of the infrastructure supply chain that got hammered.It is still going to be a big business, but we have to be a lot more thoughtful about client selection. In infra EPC space, you have large customers, they have the ability to handle the tight liquidity situation but if you are in a mid-cap space, then you die. In that situation, rates go up, banking system does not provide working capital. They just run out of resources. This is the principal lesson we have taken away.
There is this debate about capitalising staterun banks. You are majority owned by the Singapore government. Is there a lesson for India?
That is my view. The Nayak-committee report recommended it be brought down to 40%. Some people think it should go down to 26%. We are at 29% through Temasek (owned by Singapore government). That is the model which makes sense for Indian banking system. The problem of Indian banking system is shortage of capital. Capital is tight. If you are to recognise all the bad loans, you need a lot more capital. Government fiscal resources are inadequate to recapitalise the banks. In the long term, you need foreign sources of capital to re-capitalise banks. For banks like us, it creates an opportunity. We have a lot of capital as we are rated as one of the top fivesix banks in the region.
Is there an opportunity for you to do investment banking in India?
We are not a large global investment bank. If you look at the last two-three years, we have done extremely well in bringing Chinese companies to the international capital market. We have established quite well in China debt capital marketoffshore CNH market even though we are not global investment bank. We think, we can replicate the model in India as well. Particularly, the rupee bond market is opening up for international investors, where we can play extremely well. We clearly have plans and strengthened our debt capital market team.
On China, the opinions are extreme. Either you are extremely bullish, or totally bearish… Where do you stand?
It is in the middle. Everything is not hunky dory. Some of the industries are already in a recession. NPAs (bad loans) in sectors like steel, cement, coal, glass are definitely understated. The other side that China is going to explode or collapse is quite untrue. China has got a lot more fiscal capacity than India does. There are enough capital to capitalise banks there. They can absorb a trillion-dollar NPA issues and still can capitalise the banks.There is no probability, but high risk in the region is a political event. Ex-that, the country is not going to fall apart. But, there is a lot of pain in between. Next two-and-a-half years will be complicated but there is light at the end of the tunnel. We should not tar the entire economy with the same brush. It is five times the size of India. It is a $11-trillion economy. In such an economy, you can of course find 1,000 companies, which are operating well. They are operating at worldclass standard.
For financial markets, what is the biggest worry -the US, China, or Europe and its banks?
All of them are challenges. The US rate thing is the least of them. I think, you will see a rate hike this year. Another one or two next year. But, I think, it is a dovish Fed. People are very ginger about putting the base to the stone. I don’t really expect the US rate hike thing to be aggressive to have (major) global impact. European thing is still a structural problem. Overall, the Euro project is just not tenable. We cannot have a single currency regime with multiple fiscal policies with no central authority. Nationalistic sentiments are also increasing. Asia overall is slowing a bit due to China. It will be impacted by China.But, Asia has got the cushion in domestic demand. There is still a lot of resilience. — Neal Bhai Reports