Executive Speak: Sanjiv Bhasin, CEO

Q. The global financial crisis brought havoc in the banking industry world wide; however Indian banks have so far managed to remain comparatively shielded from it. To what factors do you attribute the resilience of the Indian banking industry at a time when many large banks succumbed globally? How much has the conservative approach of Indian banks contributed towards the resilience of the Indian Banking industry?

A. REASONS FOR RESILIANCE OF INDIAN BANKING SECTOR

1. RBI has taken prudent measures by encouraging banks to maintain stringent underwriting standards (e.g. increase in risk weightage in housing loans where LTV is greater than 75%). Some of the measures taken by RBI include:

1. Monetary easing measures such as reducing cash reserve ratio (5.0% vs. 9%), statutory liquidity ratio (24% vs. 25%), repo rate (4.75% vs. 9%) and reverse repo rate (3.25% vs. 6%) to release liquidity into the financial system.
2. In order to free up funds of the banks for lending, RBI decreased the provisioning requirements to 0.4% (1%) on exposures in the standard asset category towards commercial real estate sector, outstanding credit card receivables, capital market exposure and personal loans.
3. RBI announced relaxation in guidelines for restructuring of advances wherein banks could retain asset classification of loans post restructuring for all categories except consumer and personal loan, capital market exposures and non industrial businesses except SMEs.
4. Further RBI has allowed banks to restructure real estate loans (until June 30, 2009) & still classify them under standard asset. Infrastructure loans can also be classified non-performing if overdue for more than two years post date of project completion as opposed to one year earlier. These measures are expected to provide relaxation to real estate and infrastructure projects.

2. Liquidity has been a traditional strength of Indian banks with high proportion of deposits in the funding profile (80% of total liabilities). Further low cost CASA deposits account for 36% of total deposits.

3. Further 72% of banking market is controlled by public sector banks which provide the confidence in the Indian Banking System.

4. Indian Banks have been able to maintain capital ratios inspite of rapid loan expansion largely due to timely capital infusion of common equity by large private sector and government banks. As Mar 08 CAR of Indian banks stood at 13% and no bank had a CAR of less than 9%.

5. Loan portfolio of Indian banks has been largely diversified with corporate loans accounting for 35% of total loans, retail 23%, SME 6%, agriculture 12% and services 24%.

Q. What are the key growth drivers for the Indian banking industry? What are the emerging trends in the Indian banking industry?

A. Growth Drivers

With the Indian economy expected to growth at 7%-9% in the medium term (based on recent estimates by PM advisory) bank credit will continue to be a key driver for the manufacturing and infrastructure sector in India.

Indian banking sector has relatively less penetration in the rural India which is expected to be key growth driver for the Indian Banking Sector. Currently Indian Banking Sectors population per branch in close to 16,129 individuals compared to developed countries where it ranges from 2000 to 4000 population per branch.

Emerging Trends

Credit growth in India has slowed to 15.8% yoy (based on May 09 data published by RBI) compared to 25% as of May 08. However deposit growth has remained stable at 22.4% compared to 24% as of May 08. Slowdown in credit growth was driven by:

• Increased risk aversion by banks who preferred to invest in G-secs rather than lending
• High weighted average cost of funds which has forced banks to maintain high prime lending rates.

Profitability of Banks has come under pressure due to increased provisioning cost resulting from weakness in credit quality and lower margins driven by shift in deposit profile towards high cost term deposits. However margins are expected to benefit from re-pricing deposits are lower rates going forward.

Our regulator is focusing on improving risk management systems for banks including implementation of Basel II Capital Accord, focusing on counter cyclical prudential measures, better accounting and disclosure of off balance sheet items.

The new government is incrementally focusing on consolidation within the banking sector to ensure competitiveness of domestic banks thereby preparing them for opening up the banking sector to foreign banks going forward.

Q. What is the take on the prevalent interest rate scenario in the economy? Where do you see the interest rates heading towards in the near future?

A. In terms of monetary policy RBI has shown intent and is willing to cut rates going forward however since there is adequate liquidity the financial system it is pressuring the banks to cut lending rates. Lending rates has come down in the recent past with banks reducing PLR from 14%-15% to 11%-13% however their average cost funds is restricting them to cut lending further. Banks has locked in fixed deposits at significantly higher rates during Oct to Dec 08 and therefore have higher cost of funds. Since bulk of their fixed deposits are for 1 year they will be re-priced at lower rates post August this will enable the banks to further decrease their lending rates.

Q. What are the areas in which your bank plans to make capital investments in the coming year? Do you plan to expand your presence in the non- metro cities and smaller towns?

A. The Bank has just successfully opened 8 additional branches (after receipt of necessary regulatory approvals) in the current year. Focus is on consolidating the operations in these new locations, developing a high level of visibility and increasing wallet share of the Bank in these locations. Plans for expansion are dependent on receipt of regulatory approvals.

Q. What do you think is your competitive advantage over other banks?

A. DBS has a strong Parentage from DBS group and enjoys strong support from the Parent. It enjoys high external ratings from S&P / Moodys which indicates the confidence of depositors and shareholders alike. The parent is ultimately owned by the Govt of Singapore – it is the largest bank in Singapore. Moreover, the Bank has a strong risk and regulatory culture (due to strict Singaporean regulatory requirements) and this risk framework (including ops risk) has been adopted in its branches also.

Q. Does your bank have or plans to have any special programs for promoting financial inclusion in regard to providing the poor with greater reach and access to banking services? Does your bank have any special products or initiatives targeting the rural customers?

A. Financial inclusion is clearly a national priority as only around 60% of the adult population has bank accounts and the number of loan accounts is just 14 per cent of the adult population. Only 40 out of 100 of the rural population have a bank account and there exists a wide variation across states. Clearly, there is much to be done towards financial inclusion.

Being a very young bank in India and with limited presence, at DBS, our focus is on increasing our geographic reach by establishing branches in various cities (as per RBI approval) and consolidating our presence. Currently we are working towards attaining a critical mass, following which we will broaden the product spectrum on offer and increase coverage.

Q. Can you please highlight the performance and progress made by your bank in respect of extending financial and related services to SMEs?

A. Over the last five years, DBS India has been able to successfully develop its Enterprise Banking proposition which caters to the requirements of small and medium enterprises. We have substantially scaled-up both our product offerings and our customer base amongst this significant business segment. Today, we offer a comprehensive portfolio including working capital, cash management, trade finance and treasury products to SMEs. Our USP lies in our ability to leverage our deep understanding and insights of Asia as a market and enable mid-tier and small and medium enterprises (SME) to expand across the region. Through our pool of experienced relationship managers with intimate knowledge of Asian market trends and strong contacts across industries, we provide SMEs with business relationships, market insights and innovative business solutions. In FY 2008-09, we have doubled our overall customer base.