Deutsche Bank has always innovated across products to come up with solutions for customers. Ravneet Gill, CEO (India), says the practice continues and even at a time when global trade is shrinking, the bank has been able to take market share from competitors. He tells Bhavik Nair and Shobhana Subramanian that the bank is able to assess risk accurately and thereby keep the quality of assets on the balance sheet intact even as it is looking to tap the emerging market for stressed assets. Excerpts:
Is it the retail portfolio that’s driving the growth of the balance sheet?
Not really. While retail is growing, it is still relatively small. The wholesale book continues to account for the balance sheet expansion and within this transaction banking or more specifically trade finance has driven growth. We do a lot of structured finance business, where, for instance, a corporate may need a little bit of restructuring or a promoter financing or a recapitalisation. Anything which is not just pure corporate lending but needs to be structured, either in terms of a collateral or in terms of capital structure. However, given that there is no fresh investment happening, the structured finance business is growing at a slower pace than it was earlier. In the trade finance business, we continue to take market share from our competitors.
Global trade is shrinking…
It is shrinking and so is Indian trade. Given that leverage has been a very big issue for corporate India, and again cash flows have been strained, what we have tried to solve is tenor. We have gone for longer tenor trade finance and looked at more complex solutions which are mainly off-balance sheet. If you have leverage on your balance sheet and are trying to lighten the balance sheet, if a bank can come up with off-balance sheet solutions, then that becomes attractive for corporates. We tried to get over the environment of contracting client universe and lesser trade activity through solving for tenor and complexity.
Isn’t an increase in the off-balance sheet exposure a risk?
Let’s say a corporate has receivables from a top-rated institution. You just buy those receivables. That is derisking for the borrower. As far as the corporate is concerned, it is off the hook. They have got the money, and I have securitised those receivables. It is not that there is any risk which is lurking under the balance sheet. If the counterparty who was supposed to pay them doesn’t pay up, that’s for the bank to address.
And you securitise that to protect your risk?
We look at many different ways to try and lay that risk off. But as always banking is a very simple business as long as you keep one imperative in mind : client selection. When the economy is going through difficult time, certain sectors and corporates will face stress. But if the fundamental business model is sound, and the promoters are well intentioned, they will come out of it. A hand-holding period is required which obviously banks will provide. If you see Deutsche Bank’s balance sheet, our net NPAs are the lowest in the industry, it’s not because we don’t take risk. We take a huge amount of risk. I think few banks deal with the level of complexity that we do. But I just think that in terms of structuring that risk, and then choosing the right clients, is really the critical aspect and we have always been cognizant of this fact.
How much appetite do foreign investors have for Indian paper right now?
Foreign investors are certainly more selective but there’s still substantive appetite. In some ways foreigners tend to be a little more bullish on India than Indians. Banks in India are going through a very difficult time right now, a lot of the foreign investors are relatively better off; I mean they have been through that pain during the financial crisis, but have since restructured. More than top-rung, investors are looking at where a particular player is positioned in that industry. If you feel there’s someone who is still relatively small, but very competitive or has a USP in terms of being a fully integrated player, investors will look at that company. At the end of the day you also want growth stories in your portfolio. To be able to identify the winners of tomorrow itself is an art, right? A lot of investors, I think, have that finesse to figure out that this particular player may not be at the top of the industry right now but has the capability to scale up.
Are returns driving the appetite?
Actually, returns in India do not stack up that well because the market doesn’t always price risk appropriately. India is a very cost sensitive market. If you look at emerging markets like Brazil, South Africa, Indonesia, Russia, China, then India looks like a fairly sound story.
Do you securitise a lot of your exposures?
Deutsche Bank’s business model has historically been built around distribution. There are banks which are happy to just originate deals and keep it on their balance sheet. We keep some part of it on our balance sheet and distribute the rest. The only way we can do more deals and larger value transactions, is if there is a good churn and ability to decrease risk. In this respect we work with a whole cross section of investors : domestic banks, financial institutions, banks in the Middle East, other international banks/funds. If we do a transaction let’s say for 10, just for the sake of argument, we probably keep two or three and sell down the rest of it.
Are you planning to become a wholly owned subsidiary in India?
RBI has taken a reasonably enlightened view on this. RBI has said it will give us national treatment in terms of branches if we become a wholly-owned subsidiary. But foreign and Indian banks are saying that if you are looking at financial inclusion and deeper penetration, technology will enable it, and you won’t necessarily need physical branches. For us to become a wholly-owned subsidiary and obtain freedom with respect to branches in return needs to be reviewed. The second issue if you look at it from the point of view of international banks, let’s say that regulators in America, China, Singapore, India say Banks must subsidiarise locally, then what is Deutsche Bank’s capital? The capital would seem to be trapped in various countries because of wholly owned subsidiaries.
Consequently, the cost of globality for international banks will go up. If you see what has happened in recent times with many European banks — they have had to cut back their Indian operations. India clearly needs more foreign capital. At the end of the day, foreign banks bring in capital, balance sheet, risk management capabilities and technology, which can benefit not just the financial services industry, but the entire economy. Should you be creating an environment which is more facilitating for all of this? We have been discussing this with RBI and they have been very receptive and pragmatic about it.
So how do you take care of the priority sector lending? Is NABARD the main option ?
NABARD bonds do not help given the negative carry. We find other avenues like small scale industries and exports. If you are looking to grow balance sheet, obviously then priority sector obligations keep growing all the time. We have to really make an effort to stay compliant. We are not in the SME segment so it becomes that much more challenging. We have a retail bank which looks at SMEs and does a lot of the installment financing. As a wholesale bank we haven’t really looked at the SME sector. We focus mainly on the upper end of the mid-caps, large-caps, financial institutions and MNCs.