The Reserve Bank of India (RBI) has in the credit policy statement signalled its intent to revamp the business of priority sector lending—a euphemism for subsidized and targeted lending to the less privileged.
Taking up the recommendation of the Raghuram Rajan committee on financial sector reforms, RBI is setting up a working group to create priority sector lending certificates (PSLC). All entities lending to the so-called priority sector will be covered; any surplus beyond the stipulated limits for each entity can be sold to those who are in deficit. Something akin to what we have seen in the case of a carbon credit market.
On the face of it, the scheme makes a lot of sense and will presumably inject more efficiency into the business of priority sector lending. At present, not all banks have the reach or the requisite skills to understand the associated risks. Further, many banks are handicapped by a limited branch network; as a result, they either risk defaulting on their obligations or getting saddled with a bad debt. A vibrant PSLC market will ensure that this does not happen. It should also encourage specialization—which is a good thing, especially given the nature of the business.
It is an improvement on the inter-bank participation certificates introduced by RBI in 1988. Under this, a bank acquires the assets of another bank and holds it for 180 days to make up any shortfall in its priority sector lending target of 40%. However, since the risk of a bad loan falls on the acquirer, the scheme has not had many takers.
The scheme may be good, but it does not address the core issue underlying priority sector lending. It is more than four decades since the concept was launched in 1967-68—immediately after the economy went into a downturn and the government in its wisdom decided to direct more lending to sectors such as agriculture and the small-scale industry. The notion has undergone several revisions, with the government altering targets and sub-targets under different priority sectors. It has now become a gigantic scheme that suffers from gross inefficiencies. Moreover, the economy, too, today is vastly different—both in quantitative terms as well as structurally.
But does the government have the political will to address the problem?
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