Repetitive priority sector lending (PSL) shortfall needs to be channelised to, for instance, infrastructure effectively
PSL directions last revised in September 2020, require domestic and foreign banks to achieve a credit disbursement target of 40% of lending book while regional rural banks (RRB) and small finance banks (SFB) need to attain 75%.
By Ashish Kapur
Agriculture, along with micro, small and medium enterprises (MSMEs), has deservedly enjoyed policy incentivisation through RBI’s priority sector lending (PSL) guidelines.
PSL directions last revised in September 2020, require domestic and foreign banks to achieve a credit disbursement target of 40% of lending book while regional rural banks (RRB) and small finance banks (SFB) need to attain 75%. Smaller foreign banks have some leeway and largely meet 32% of the overall target by arranging export pre & post-shipment credit, benefitting Indian exporters.
PSL commitments encompass sectoral targets including agriculture at 18%, of which 10% minimum is set aside for small & marginal farmers (SMF); 7.5% for micro-enterprises; and 12% towards advances to weaker sections–weaker sections & SMF sub-targets can be met in a staggered manner till FY24. Domestic and larger foreign banks have other directed parameters to comply, like funding to non-corporate farmers meeting a system-wide average of the last three years’ achievement, notified by RBI annually. That full faith has been reposed in agri-lending credit & marketing intent of a Citi, Federal or an Oriental finance house, which are all bunched together in the same target pool, isn’t exactly a matter of great pride!
Newer PSL segments, added in the last few years, mirroring domestic priorities like renewable energy, affordable housing, start-ups, etc, have helped along with other reforms.
Much like how sleepy Joes’ wake-up last minute to ace their year-end final exams, there was often a mad year-end disbursement scramble by banks to meet targets when PSL achievement was measured annually. RBI, in a long-overdue change, smartly reworked the assessment criteria to quarterly tests from FY17 so that Banks take their obligations more seriously and credit bunching in the March quarter is avoided.
The introduction of tradeable PSL certificates (PSLC) in FY17 to incentivise RRBs, urban co-operative banks, SFBs and other commercial banks exceeding PSL commitments is a welcome change. Over-achievers issue a certificate to those facing a shortfall via auction bids on RBI’s e-Kuber platform. Banks that have exceeded PSL targets gain a market-driven fee to augment earnings and shortfall banks indirectly achieve targets by buying PSLCs without actually sharing risk or disbursing loans outside the scope of their core credit/marketing competency.
Popularity of PSLCs can be gauged by the 43% increase in platform trading volumes to Rs 4.68 lakh crore in FY20, per the recent RBI report on trends & progress of banking in India 2019-20. Newly set-up SFBs and RRBs were net aggregate sellers of PSLCs in FY20, while foreign banks remained net buyers. Surprisingly, the two largest players in the PSLC market–PSU & private banks–in a trend reversal, became net overall aggregate buyers and sellers respectively in FY20.
PSL shortfall banks have the option to invest in NABARD’s rural infrastructure development fund, that’s mainly utilised by states. Is such contribution for non-fulfilment of directed priority credit still relevant in today’s times? What more is required for effectively disbursing farm credit? Could repetitive PSL shortfall be channelised elsewhere effectively, for instance, in infrastructure?
Differential banks focussed on Agriculture could be a possible answer. These will also better relate to the proposed reforms and ensure effective farm credit transmission. Agri-bank PSLCs will also be more credible and can be traded within the network. While PSL GNPA ratio rose from 7.6% to 8.3% in FY20, as a percentage of total NPAs, PSL GNPAs of scheduled commercial banks stood at 32.8% (FY19: 27.7%) and Agri GNPAs at 15.1% (FY19: 12.1%). Considering the pandemic impact, this will deteriorate further, and a dedicated agri-bank for closer farm credit monitoring becomes essential.
Besides RRBs, small NBFCs lend to farmers at high rates for financing equipment like tractors, as many banks shy away from such lending. If RBI can consider structuring NBFC participation in PSLC trading, such agri-lending can be incentivised and a trickle-down effect resulting in a lower cost to farmers targeted. PSLC selling by such NBFCs not having PSL targets can also be routed via the dedicated agri-bank if allowing access to the e-auction system is difficult.
With regard to MSMEs, Udyam certification from entrepreneurs is mandatory for Banks starting April to classify PSL lending. Until now, either Udyam or plant & machinery investment proof along with a declaration was sufficient to classify PSL exposure. With many entrepreneurs still unaware of the Udyam portal registration requirement, banks won’t be able to classify a sizeable chunk of the erstwhile portfolio as PSL post-March. Consequently, multiple MSMEs will lose preferential pricing in case no rule relaxation is forthcoming.
Furthermore, whenever core industrial houses are permitted to start banks, their ability to develop strong manufacturing supply chains through MSME and their understanding of key criteria that differentiates a well-run unit from a poor one needs to be leveraged by tweaking their sub-targets, especially in light of higher micro & small enterprises GNPAs at 12.9% of total NPAs in FY20 (FY19: 11.4%).
Repetitive PSL shortfall without adequate efforts by deficient banks can be channelised to the new infrastructure development bank where it will, hopefully, be better utilised via bonds, even if yielding only marginal returns.
Certified treasury manager and veteran corporate banker. Views are personal