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The Reserve Bank of India working group also suggested that new sectors be added to the priority sector category, including exports and renewable energy. Photo: Bloomberg (Bloomberg)
The Reserve Bank of India working group also suggested that new sectors be added to the priority sector category, including exports and renewable energy. Photo: Bloomberg
(Bloomberg)

RBI report calls for raising foreign banks’ priority sector lending target

PSL target for all banks, including foreign banks, should be at 40% of adjusted net bank credit, says RBI panel

Mumbai: The Reserve Bank of India (RBI) on Monday released a report on revisiting priority sector lending (PSL) norms, which proposes an increase in the PSL target for foreign banks, while introducing new sectors into the definition of priority sector.

As part of the suggestions, the working group says the PSL target for all banks, including foreign banks, should be at 40% of adjusted net bank credit. While domestic banks already lend 40% of credit to priority sectors, foreign banks lend 32%. Though the group has increased the PSL obligations for foreign banks, they have been given time to achieve the new targets.

“Foreign banks with 20 and above branches may be given time up to March 2018 in terms of extant guidelines and submit their revised action plans.

Other foreign banks with less than 20 branches, may be given time up to March 2020 to comply with the revised targets as per action plans submitted by them and approved by Reserve Bank," the report said.

The group also suggests that new sectors be added to the priority sector category, including exports and renewable energy.

“The working group has focused on channelling credit to segments that get crowded out in the absence of specific targets. These include small and marginal farmers, micro enterprises and the weaker sections while broadening the scope to include other underserved categories of national priority, such as agriculture infrastructure, social infrastructure, renewable energy, exports and medium sized enterprises," RBI said.

In addition to micro and small enterprises, medium enterprises are included within the ambit of priority sector lending. To ensure that the micro enterprises are not crowded out, a sub-target of 7.5% for micro enterprises has been recommended, which is to be achieved in a phased manner.

The central bank’s internal working group has agreed to keep the lending target for agriculture segment fixed at 18% of adjusted net bank credit.

However, the group has suggested introducing a sub-target of 8%, recommended for small and marginal farmers to be achieved in a phased manner.

“More flexibility has been recommended for banks to lend the remaining 10% of the overall agriculture loan target to other farmers, agricultural infrastructure and ancillary activities as defined by the Group," the report says.

The working group has also recommended introduction of priority sector lending certificates (PSLCs) which will enable banks to meet their PSL requirements while leveraging their comparative advantage in lending.

The model on PSLCs envisages that banks will issue PSLCs that can be purchased at a market determined fee on an electronic platform, the report said. The buyer can substitute some part of his PSL target with a PSLC.

PSLCs would count specifically towards PSL achievement and thus would be sector or sub-sector specific where particular targets have been mandated, the report said.

“It has been a long standing demand from the banking sector to make certain changes in PSL lending targets and the sectors which qualify for PSL. Bringing export finance to the ambit of PSL shows that RBI agrees with banks that it is a rather important segment and requires more credit. Similarly, a rejig in the agricultural lending would help in better transmission of credit and will help banks in hitting their lending targets more effectively," said the former chairman of a public sector bank on condition of anonymity.

Another former public sector lender said that the success of PSLCs would depend heavily on the kind of returns they are able to give lenders who fall short of their lending target. At present, whenever lenders fall short of their lending target, they invest the shortfall into the Rural Infrastructure Development Fund (RIDF), which gives returns between 5-6% presently, said the former public sector lender.

The report also suggests punitive measures for not fulfilling PSL targets.

The need for more stringent measures such as imposition of monetary penalties could be considered either independently or in combination with the existing provisions after a period of three years of starting the PSLC market and based on the performance of banks in achievement of targets, the group said in the report.

The Economic Survey 2014-15, which was released on Friday, suggested that norms regarding PSL could be reassessed in order to bring in better distribution of bank funds to sectors that are starved for capital.

The internal committee was headed by Lily Vadera, chief general manager, department of banking regulation at RBI.

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