The recent regulation issued by RBI last week on priority sector lending has created undulation among large foreign banks with more than 20 branches and has created smiles for smaller foreign banks having less than 20 branches. In August 2011, RBI had set up a committee to re-examine the priority sector lending classification and related issues, chaired by MV Nair. The committee categorised the priority sector into seven categories.
Many large international banks with an established presence in India are already well integrated into the domestic system and are competing with domestic banks. The new priority sector regulations have bifurcated foreign banks into two categories. One, with more than 20 branches as large foreign banks, and the other group with banks with less than 20 branches as a smaller foreign banks. RBI rendered these larger banks at par with domestic banks, sharing the same priority sector requirements as domestic banks. Their target to meet the priority sector has been increased from 32% to 40% of adjusted net bank credit (ANBC), in line with domestic banks. Moreover, to meet their sub-target, these banks are now also required to lend to the agricultural sector in line with domestic banks, keeping sub-target of 18% of ANBC.
Undoubtedly, these large banks are not geared up like, and do not have the expertise of, domestic banks in providing agricultural loans. Even their SME segment is curtailed, due to a rise in NPA levels. With a lack of any agricultural expertise, the only option large foreign banks have is to go for an indirect route for financing agricultural loans in the initial phases. RBI has been quite lax in the implementation of the plan by giving it 5 years to be implemented, starting from April 01, 2013, to March 31, 2018. However, regulators are quite keen to know their action plan by December 31, 2012.
This move by RBI is a clear indication of it walking towards the wholly owned subsidiary (WOS) route. Focusing on the role of agriculture in the Indian economy, in the draft presented by RBI on the WOS route, a sub-target of 10% on agricultural advances was recommended for WOS. It is a matter of internal debate for larger foreign banks whether they should look out for the WOS route or continue with the 40% priority sector target, including 18% for agricultural target.
Small foreign banks with less than 20 branches are grinning happily as they do not have to maintain any sub-target for agriculture, SME and export credit. Overall, they are just required to maintain 32% of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.
Small banks require more branches to expand. The limit of 20 branches in the priority sector should not become a single point restraint for expansion. Another avenue is also available by adopting the WOS route and having a lower sub-target of 10% for agricultural advances.
The new norms recognise investment in securitised loans for the priority sector with the condition that the rate charged (all inclusive interest) to the ultimate borrower should not exceed the base rate of the investing bank, plus 8% per annum.
From the social prospective, the regulator has done a good job by including bank lending to farmers, who are caught in the web of moneylenders and other non-institutional organisations, in priority sector lending. Loans to individuals other than farmers up to R50,000 to pre-pay their debt to non-institutional lenders will also be eligible for priority sector lending under the revised guidelines.
The regulator has also given clear instructions that the non-achievement of the priority sector target and sub-targets be taken into account while granting any regulatory clearance/approval for various purposes. One should notice that, in the current scenario, the majority of foreign banks are struggling to meet their priority sector lending targets.
It goes without saying that in future, 20 branches operations may become a benchmark for foreign banks operating in India.
The author works for a multinational bank. The views expressed are his own and do not necessarily represent those of his employer
