By Ashish Kapur
Agriculture, along with micro, modest and medium enterprises (MSMEs), has deservedly enjoyed policy incentivisation by way of RBI’s priority sector lending (PSL) recommendations.
PSL directions final revised in September 2020, need domestic and foreign banks to reach a credit disbursement target of 40% of lending book although regional rural banks (RRB) and modest finance banks (SFB) want to attain 75%. Smaller foreign banks have some leeway and largely meet 32% of the general target by arranging export pre & post-shipment credit, benefitting Indian exporters.
PSL commitments encompass sectoral targets such as agriculture at 18%, of which 10% minimum is set aside for modest & marginal farmers (SMF) 7.5% for micro-enterprises and 12% towards advances to weaker sections–weaker sections & SMF sub-targets can be met in a staggered manner till FY24. Domestic and bigger foreign banks have other directed parameters to comply, like funding to non-corporate farmers meeting a method-wide typical of the final 3 years’ achievement, notified by RBI annually. That complete faith has been reposed in agri-lending credit & advertising intent of a Citi, Federal or an Oriental finance home, which are all bunched collectively in the identical target pool, is not precisely a matter of terrific pride!
Newer PSL segments, added in the final handful of years, mirroring domestic priorities like renewable power, very affordable housing, start out-ups, and so on, have helped along with other reforms.
Much like how sleepy Joes’ wake-up final minute to ace their year-finish final exams, there was usually a mad year-finish disbursement scramble by banks to meet targets when PSL achievement was measured annually. RBI, in a extended-overdue modify, smartly reworked the assessment criteria to quarterly tests from FY17 so that Banks take their obligations more seriously and credit bunching in the March quarter is avoided.
The introduction of tradeable PSL certificates (PSLC) in FY17 to incentivise RRBs, urban co-operative banks, SFBs and other industrial banks exceeding PSL commitments is a welcome modify. Over-achievers situation a certificate to these facing a shortfall through auction bids on RBI’s e-Kuber platform. Banks that have exceeded PSL targets achieve a industry-driven charge to augment earnings and shortfall banks indirectly reach targets by getting PSLCs with out truly sharing threat or disbursing loans outdoors the scope of their core credit/advertising competency.
Popularity of PSLCs can be gauged by the 43% boost in platform trading volumes to Rs 4.68 lakh crore in FY20, per the current RBI report on trends & progress of banking in India 2019-20. Newly set-up SFBs and RRBs have been net aggregate sellers of PSLCs in FY20, although foreign banks remained net purchasers. Surprisingly, the two biggest players in the PSLC market–PSU & private banks–in a trend reversal, became net general aggregate purchasers and sellers respectively in FY20.
PSL shortfall banks have the selection to invest in NABARD’s rural infrastructure improvement fund, that is mostly utilised by states. Is such contribution for non-fulfilment of directed priority credit nevertheless relevant in today’s instances? What more is expected for correctly disbursing farm credit? Could repetitive PSL shortfall be channelised elsewhere correctly, for instance, in infrastructure?
Differential banks focussed on Agriculture could be a feasible answer. These will also superior relate to the proposed reforms and make certain productive farm credit transmission. Agri-bank PSLCs will also be more credible and can be traded inside the network. While PSL GNPA ratio rose from 7.6% to 8.3% in FY20, as a percentage of total NPAs, PSL GNPAs of scheduled industrial banks stood at 32.8% (FY19: 27.7%) and Agri GNPAs at 15.1% (FY19: 12.1%). Considering the pandemic effect, this will deteriorate additional, and a committed agri-bank for closer farm credit monitoring becomes vital.
Besides RRBs, modest NBFCs lend to farmers at higher prices for financing gear like tractors, as several banks shy away from such lending. If RBI can look at structuring NBFC participation in PSLC trading, such agri-lending can be incentivised and a trickle-down impact resulting in a reduced expense to farmers targeted. PSLC promoting by such NBFCs not getting PSL targets can also be routed through the committed agri-bank if enabling access to the e-auction method is challenging.
With regard to MSMEs, Udyam certification from entrepreneurs is mandatory for Banks beginning April to classify PSL lending. Until now, either Udyam or plant & machinery investment proof along with a declaration was enough to classify PSL exposure. With several entrepreneurs nevertheless unaware of the Udyam portal registration requirement, banks will not be in a position to classify a sizeable chunk of the erstwhile portfolio as PSL post-March. Consequently, many MSMEs will drop preferential pricing in case no rule relaxation is forthcoming.
Furthermore, anytime core industrial homes are permitted to start out banks, their capacity to create sturdy manufacturing provide chains by way of MSME and their understanding of important criteria that differentiates a properly-run unit from a poor one requires to be leveraged by tweaking their sub-targets, specifically in light of larger micro & modest enterprises GNPAs at 12.9% of total NPAs in FY20 (FY19: 11.4%).
Repetitive PSL shortfall with out sufficient efforts by deficient banks can be channelised to the new infrastructure improvement bank exactly where it will, hopefully, be superior utilised through bonds, even if yielding only marginal returns.
Certified treasury manager and veteran corporate banker. Views are individual