Mumbai: Commercial banks that aren’t keen on lending in the country’s unbanked areas may find themselves having to pay as much as one percentage point more for refinance from the National Bank for Agriculture and Rural Development (Nabard).
About $3 billion is to be disbursed this year by the institution as refinance to banks.
Nabard, the apex institution that refinances banks for onlending to critical sectors, including agriculture and rural infrastructure, last week scrapped its 30-year-old system of uniform lending rates to all commercial banks. Nabard will now decide the lending rate for such loans to individual banks after assessing how efficiently they deploy the refinance amount, said Prakash Bakshi, chairman of Nabard.
“We have been observing that some banks are not lending to borrowers in undeveloped states. If they want to get the refinance money, they should now start lending to segments where credit is not available,” he said. The minimum that Nabard charges for refinance is 10.5% and banks lend this to borrowers with a 2-3% margin.
The refinance cost could escalate to as much as 11.5% if they don’t meet Nabard’s criteria, Bakshi said. Nabard’s aim is to encourage banks to lend more to states such as those in the North-East, where credit availability is poor, he added.
“I have no issues if banks lend to states which are already developed. But if they want to use Nabard’s refinance amount, it should be for lending to unbanked areas,” Bakshi said. “Loans should be given to long-term projects, instead of lending only short-term working capital loans.”
This will raise the cost of money for banks, which have to contend with a central bank that has been seeking to curb inflation—policy rates have been raised 11 times since March 2010.
Nabard’s move comes as the Reserve Bank of India (RBI) has been tightening norms to persuade banks to step up their priority sector activity and nudge them to do more direct lending to the poor as it seeks to broaden financial inclusion. Under the current norms, banks have to lend 40% of their loans to agriculture, exports and weaker sections categorized as the priority sector.
RBI has announced a series of measures in the last few months towards this end. It has removed the priority sector status to loans given to non-banking financial companies, except those operating as microlenders. It has also made it mandatory for banks to report the progress of their priority sector lending more frequently.
Till recently, Nabard used to provide refinance for commercial banks at a uniform 10.25%, and at 9.25% for cooperative and regional rural banks, irrespective of loan size or track record. The new rule will apply to all commercial banks effective 29 July. Last year, Nabard disbursed Rs 13,486 crore to banks as refinance and has targeted to increase the amount to Rs 14,500 crore this year, Bakshi said.
An increase in the refinance rate will help Nabard improve its interest income, which contributes nearly 80% of total revenue.
Banks that traditionally avail of Nabard finance are ICICI Bank Ltd, Axis Bank Ltd and IDBI Bank Ltd, among others. Small and medium-sized banks, with less access to cheaper deposits, are more dependent on such finance than the bigger lenders. ICICI Bank did not immediately respond to an email seeking comments.
Nabard’s stipulation could largely impact these banks, which also typically have a weak presence in far-flung areas, analysts said.
“Those banks with lower current, savings account deposits will get impacted more compared to the bigger ones, depending upon their exposure to Nabard,” said Santosh Singh, analyst with Espirito Santo Securities.
Typically, Nabard lends to banks for a maturity of 5-10 years, depending on the completion of projects for which the money is given. Banks take loans from Nabard as such finance is cheaper than funds from other sources such as deposits and certificates of deposit.
Some senior bankers said lenders may stop seeking refinance from Nabard if the costs are too high.
“If they make the rates unattractive, then nobody will draw refinance,” said K.R. Kamath, chairman and managing director of Punjab National Bank. “There is no question of somebody saying that money is not properly utilized as the refinance is given based on our performance.”
Punjab and Sind Bank executive director P.K. Anand echoed this.
“The objective is quite laudable. But how many banks are really going to them (Nabard) for refinance at 10.5% or above is the question,” with certificates of deposit and deposits available at lower than the Nabard rate, he said. “When liquidity is sufficient in the system, even if they offer refinance, banks may not take it.”
Hatim Broachwala, an analyst with brokerage Fortune Financials, said Nabard’s step will help move towards more widespread distribution of credit in the country.
“What is critical is the availability of adequate credit to all sections in the country to promote financial inclusion. Going ahead, Nabard’s role will be to ensure this goal,” he said.
Nabard, which began as a development organization in 1982, largely restricted itself to refinancing cooperative banks and regional rural banks till it started funding big-ticket projects such as the construction of cold storages on a commercial basis in February.
In October, the apex bank sold its stake worth Rs 1,430 crore in Nabard to the government.