RBI’s priority sector lending norms a boon for banks

Mumbai: The Reserve Bank of India’s (RBI) new priority sector lending (PSL) norms has received a thumbs-up from both bankers as well as analysts as it opens new lending opportunities and increases possibilities of lending to this sector in a profitable way.

Indian banks have to mandatorily lend 40% of their net bank credit to sectors such as agriculture, small enterprises and weaker sections of the society.

The new norms released on Thursday included three new categories for lending: medium enterprises, social infrastructure and renewable energy.

The RBI also removed the distinction between direct and indirect lending to agriculture, re-introduced export credit within priority sector and said banks can buy and sell so-called PSL certificates after the guidelines for the same are issued later.

Analysts said the new norms have thrown the field wide open for banks and will particularly benefit the private sector banks which with their limited rural network were so far struggling to make up their agriculture sector target. “Private sector banks will be biggest beneficiaries because they can now lend to sectors which are commercially viable. But for foreign banks with less than 20 branches, fulfilling the 40% priority sector norms will be difficult,” said Vaibhav Agrawal, vice-president, Angel Broking.

The new norms suggest that foreign banks with less than 20 branches also have to achieve 40% PSL like all other banks and up in a phased manner till the year to March 2020. These banks had a lower 32% target so far.

Jaideep Iyer, group president (financial management) with Yes Bank Ltd, said that the new norms are a boon to private sector banks like his as it allows banks to do commercial lending.

“For example we can now raise infrastructure bonds which are exempt from PSL but still use the money to lend to renewable energy. The lending can also be extended to sectors like warehousing for which there is an increase in demand. Social infrastructure is also a big sector which has many opportunities,” he said.

Social infrastructure has been defined by the RBI as loans up to Rs.5 crore per borrower for building schools, healthcare facilities, drinking water facilities and sanitation facilities in smaller centres. Renewable energy includes loans up to Rs.15 crore to borrowers for solar, biomass, wind, micro-hydel plants and for non-conventional energy-based public utilities like street lighting systems, and remote village electrification.

Purvesh Shelatkar, head of research at Bank of Baroda Capital Markets Ltd said the new norms are a boon for companies like Suzlon Energy Ltd and large private sector banks like HDFC Bank Ltd. “It is the best thing that could happen to the sector as a whole. Banks like HDFC which so far could not achieve their targets can now really motor along. I would go so far as to say that these new norms could lead to a re-rating for bank stocks, especially public sector ones because PSL lending, which was so far a drag on earnings, could now become a money spinner. Credit growth which is lagging in single digits could rise from 12% to 13% this fiscal just because of this,” said Shelatkar.

Suzlon chairman Tulsi Tanti called the move a “progressive,” one which would help India achieve energy security.

Even public sector banks, which so far had little trouble in fulfilling the RBI’s PSL targets, welcomed the move because it will give them more flexibility to achieve their targets.

Arun Tiwari, chairman and managing director at Union Bank of India, said the new norms by the inclusion of sectors like medium-sized enterprises and social infrastructure is in line with the current national priorities. “There are also small changes like PSL loans to micro, small and medium enterprises will continue to be classified as priority for three years which gives these companies enough leeway even if they grow bigger. Also, the classification of education loans have been liberalized,” said Tiwari.

The new norms say that all education loans up to Rs.10 lakh irrespective of the sanctioned amount will be considered as eligible for priority sector.

However, Anuj Jain, assistant general manager at Care Ratings Ltd, said the micro classification of different sections could pose a problem for banks. For example, within the 40% PSL target, 18% is earmarked for agriculture of which 8% has to be lent to small and marginal farmers. Similarly lending to micro enterprises has to make up 7.5% of the PSL.

Tiwari acknowledged that achieving these smaller sub targets will be a challenge together with the fact that banks will have to calculate their net credit on a quarterly basis versus on an annual basis previously.