RBI put out a report on March 2 by an internal group, which suggested changes to the existing priority sector lending (PSL) guidelines. On the face of it, the recommendations look neutral for PSUs/private banks with enhanced classification limits and the abolition of direct lending targets being netted off by the introduction of an 8% target for small/marginal farmers and the introduction of 7.5% target on micro enterprises.
Foreign banks (with <20 branches) enjoy regulatory dispensation on various PSL targets, which the group recommends to do away with.
For NBFCs, it has been recommended that the priority classification for on-lending be retained, but the introduction of priority sector lending certificates (PSLC) for the trading of PSL obligations within banks may change the way banks buy PSL loans from NBFCs.
However, we think on a system level the quantum of buyouts may not change substantially, though we need to get more clarity on this.
Key recommendations include maintaining overall PSL target at 40% and 10% sub-target for weaker section. Smaller foreign banks will also have to adhere to these versus a lower 32% PSL target and no weaker section target currently. Overall agri target is recommended at 18%. The panel suggests doing away with the 13.5% direct agri lending target, which most banks miss, but introduces an equally difficult 8% target of lending for small/marginal farmers.
For MSME, the panel has included medium enterprises as priority and enhanced the definition of the size of small/micro enterprises. The negative drag would be a 7.5% target on lending to micro enterprises. Compliance of PSL target have been recommended on a quarterly basis rather than yearly basis. This could impact banks that manage growth in the last quarter.
The introduction of the concept of priority sector lending certificate (PSLC) will allow banks to trade PSL obligations with each other and pricing will likely vary based on the shortfall of each sub-category of PSL.
For PSU and private banks, these PSL guidelines are a mixed bag with enhanced classification limits and the recommended withdrawal of direct agri lending limit as positives netted off by the limit on small/marginal farmers and separate limit on micro enterprises. We believe PSU banks will be better placed on lending to small/marginal farmers versus private banks, and for micro enterprise lending, banks with better business banking platforms (Axis/HDFC Bank/regional banks) would be better placed.