Bankers feel the recommended sub-targets of loans to small farmers and micro enterprises under the priority sector lending norms will be a challenge. However, it may prove to be an opportunity for non-banking financial companies (NBFCs), if allowed to participate in the priority sector lending certificate trading platform.
The RBI published the recommendations of a working committee on PSL norms on Monday with the most significant revisions being an 8% sub-target of loans to small and marginal farmers and a 7.5% target for micro enterprises. However, it also recommended lifting the caps on loans given to create agricultural infrastructure or in agri-processing activities.
Religare Institutional Equities analysts pointed out that while banks, especially from the private sector, have regularly defaulted in meeting sub-targets of weaker sections, they would now also find it difficult to meet the new norms.
“The 8% target is the most difficult part, especially for banks, which do not have much of a rural presence. On the other hand, agriculture credit now includes loans given to set up godowns, supply chain infrastructure, cold storage, etc, – which is substantial,” SKV Srinivasan, executive director of IDBI Bank, said.
Private sector banks will be more impacted than public sector counterparts, due to their relatively low exposure to agricultural credit, which is also tilted towards large farmers, according to analysts.
“Clearly, private sector banks (will be impacted) as their exposure to small and marginal farmers is very miniscule,” Macquarie Research analysts said in a report issued on March 2.
The micro enterprises sector has historically been serviced mainly by NBFCs, which have customised their offerings to the unique issues in the business.
“The micro enterprises usually don’t have balance sheets and that’s a tricky sector to lend to. Banks will have to try and innovative methods of credit monitoring, techniques of surrogate income assessment, set up specific recovery mechanisms,” Srinivasan added.
Bankers think the introduction of priority sector lending certificate (PSLC) norms balances out the intense focus on small sectors and also gives banks a breather to plan a strategy. The PSLCs will be traded on an electronic platform, but the buyer will not take on the underlying credit risk.
“If a bank wants to focus on funding micro enterprises, it can over-achieve the specified targets and, then, trade on that. Foreign banks, especially, will benefit from this norm,” Srinivasan said.
“If the RBI allows NBFCs to issue PSLCs in the future (only banks are allowed currently), we expect retail NBFCs like Shriram Transport Finance and Mahindra & Mahindra Financial Services to emerge as key beneficiaries,” Religare Institutional Research analysts said in a note issued on Monday. Analysts said the defined targets also increase the risks of loans turning bad.
“The recommended norms look challenging from an NPA point of view, and not from a growth perspective. NPAs usually crop up from the capital side of agriculture, so these are very NPA-prone sub-sectors,” said an analyst from an international brokerage, who did not wish to be named.
Bankers say they can mould strategy to meet new norms, but it will not work if PSL norms keep changing continuously. “Two years is a reasonable period to meet the targets, provided they don’t change it,” Srinivasan said.