The plan to make priority sector loan portfolio of banks tradeable is likely to be abandoned. After consultation with various stakeholders, the internal working group set up by the central bank has said that implementing this proposal could deflect the attention of most banks from actual lending to buying credits from a few banks that more than meet the targets.
The banks short of meeting their priority sector targets could meet their requirements by buying the priority sector lending certificates (PSLCs) from other banks in the open market. The suggestion to introduce PSLCs and make them tradable in the open market was originally made by a committee on financial sector reforms headed by Raghuram Rajan.
In October last year, the Prime Minister’s Office suggested that the Reserve Bank of India review this proposal. The RBI then set up a working group in the following month to examine pros and cons. The group was to submit its report by June 2010 but it has not done it so far.
As per the RBI guidelines, scheduled commercial banks are required to lend 40% of the adjusted net bank credit to the priority sectors such as agriculture, micro and small enterprise (MSE) and exports, among others. The sub-target for agriculture is 18% while there is no such thing for MSE and export sectors. In the last financial year the commercial banks lent Rs 2.75 lakh crore to the agriculture sector, as against a target of Rs 2.5 lakhs, as some of the banks lend above the targets while many missed it.
Any domestic commercial bank that does not meet the priority sector targets is required to contribute to the Rural Infrastructure Development Fund (RIDF) maintained by Nabard. These banks contribute to RIDF to the extent of their shortfall in stipulated priority sector lending to agriculture. The government is of the view that this system is working well and there does not appear any need to introduce priority sector loans certificates (PSLCs).
The Economic Survey 2008-09, too, suggested the government to allow trading of directed credit obligations among banks and other financial institutions. ?This will allow and encourage the development of financial institutions that can specialise in and exploit economies of scale and scope in unbanked and low-banked areas and sectors,? the survey argued.