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New Delhi: The government is considering restructuring the priority sector lending (PSL) scheme to allow deposits made by banks in the Rural Infrastructure Development Fund (RIDF) and such other funds to qualify as exposure under PSL, two people informed of the development said.

The proposed changes are expected to provide banks additional flexibility in meeting sector-specific PSL targets and free up capital for extending credit to industrially vibrant sectors, fostering economic growth.

Reserve Bank of India (RBI) regulations require banks to allocate 40% of their adjusted net bank credit (ANBC) for the priority sector, comprising agriculture, small and medium enterprises, exports, and economically vulnerable groups such as small farmers, micro-enterprises, and disadvantaged segments.

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Graphic: Mint

Banks approached the finance ministry, requesting changes in PSL classification, according to one of the two people familiar with the development.

The ministry is now likely to take up the matter with RBI, and a decision to restructure the PSL norms is expected to be taken soon, the person said.

Currently, deposits banks make in RIDF and other such funds are not allowed to compensate for the shortfall in meeting PSL targets, and are not recognized as part of the banks’ exposure in the corresponding PSL sub-categories. These placements, facilitated through institutions such as Nabard, Sidbi, and Mudra, are categorized as lending under ancillary services, other finance to MSMEs, and housing.

Once the changes are approved, the revisions would result in banks’ investments in eligible funds, aligned with the annual allocation, being recognized as bank lending within the sub-categories of PSL that correspond to the respective shortfall ratio for that specific year.

“The changes would allow banks more flexibility towards meeting their PSL targets in the event where demand for credit in certain sub-categories is lower, or the bank has not been able to identify suitable sections for loans. Also, it would free up more funds for onward lending sectors that generate more profit for banks at a time when a global slowdown is expected to further squeeze credit flows," said a top executive of a public sector bank, asking not to be named.

Queries sent to the finance ministry, secretary of financial services, and RBI remained unanswered till the time of going to press.

According to a study, the top five industries that drive credit growth for banks are large industry (about 20%), housing (about 15%), NBFCs (about 10%), trade (about 6%) and vehicle loans (about 4%).

According to a Nabard report, PSL shortfall deposits surged to 2.52 trillion in March 2022 from 99,000 crore in March 2021.

Additionally, there has been a rise in the trading of Priority Sector Lending Certificates (PSLCs) that can be used to cover the shortfall in PSL targets by banks and are issued by those overshooting their targets. According to RBI data, the trading volume of PSLCs rose 12.4% to 6.62 trillion by the end of FY22.

According to RBI’s bank credit report, the outstanding gross bank credit under PSL as of 24 March stands at 17.08 trillion for agriculture, 15.70 trillion for micro and small enterprises, 3.99 trillion for medium enterprises, 6.21 trillion for housing, 58,634 crore for education loans, 4,656 crore for renewable energy, 2,464 crore for social infrastructure, 15,696 crore for export credit, 59,659 crore for other sectors, and 14.41 trillion for weaker sections including PSLCs.

While lending in most PSL sectors has grown in FY23, there has been a decline in export credit and flows for social infrastructure.

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Updated: 16 May 2023, 01:01 AM IST
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