Governments have, over the years, pursued their financial inclusion agenda at the cost of the financial health of public sector banks. As if forcing banks to lend 40% of their net credit to agriculture, micro-enterprises, weaker sections, exports and education—under an umbrella called the priority sector—wasn’t bad enough, some governments have resorted to loan waivers, not just causing irreparable damage to banks’ balance sheets but also vitiating the repayment climate. Given the reality of priority sector lending (PSL) becoming a holy cow, the best solution was to let the label remain, but add more items under it. This is what the Economic Survey also suggested when it pointed to how agriculture credit had grown while agriculture itself had been shrinking relative to the rest of the economy. To that extent, an RBI working group has done well to recommend broadening the scope of the priority sector—it has suggested that medium enterprises be part of PSL, which is a good idea since the ticket sizes here come with a cap of R10 crore. Including lending to social infrastructure—schools, healthcare, sanitation, drinking water facilities and renewable energy—under the category of PSL is also good idea. Adding rural housing to this category is also a good idea.
What is problematic, however, is that while retaining the 18% limit for lending to agriculture, the working group has suggested banks lend 8% within this overall target to small and marginal farmers. On a rough reckoning, that would be around R2 lakh crore, an amount that would be difficult to lend judiciously and the idea seems altogether unfair even if the banks have been given time till FY17. The other challenge for banks will be lending to micro-enterprises for which the sub-limit has been set at a fairly difficult 7.5%; lending to such sectors is best left to microfinance institutions that are better-positioned to do this. While including new sectors opens up opportunities for banks, the pressures from allocating 10% for the weaker sections will persist. Banks are already grappling with high agriculture NPAs—in FY14, the NPAs were 5.8% or R38,000 crore on outstanding exposure of R6.7 lakh crore.
The introduction of priority sector lending certificates (PSLC) to help banks meet their PSL targets may sound like a good idea but it is doubtful whether this will work; given how even many of the state-owned lenders fall short of their direct agriculture lending targets, there is unlikely to be too much paper available. In such a situation, the premiums on such paper will be very high, but banks may prefer buy the certificates at a higher cost than having a direct exposure. The market could become deeper if the RBI allows NBFCs to issue these certificates.