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C. Shivkumar

In order to avoid penalties, some foreign banks have begun activating their lines of credit with the public sector banks for funding their compliance with priority sector loan targets or taking them out.

Bangalore , Feb. 7

FACED with slippage in priority sector lending targets, new generation private sector and foreign banks have begun making moves to buy them out from their public sector counterparts.

Present RBI guidelines mandate that at least 40 per cent of the net bank credit be earmarked for certain designated sectors, which include exports, housing, rural and agriculture sectors. The guidelines prescribe that at least 18 per cent of the net bank credit be earmarked exclusively for agriculture.

However, banking sources said most of foreign and new generation banks have fallen short of the agriculture lending targets. The reason for this shortfall was on account of misconceived notion among some of them that agriculture was not a viable sector for lending. Lending rates to agriculture sector range between 9 per cent and 11 per cent.

In addition, few foreign and new generation private banks were prepared to bear the administrative costs of disbursing large volumes of small ticket loans. Instead, most of them preferred to be in less administratively cumbersome sectors such as retail and corporate lending including lending in foreign currencies.

Such activities earn spreads of about 6 to 8 per cent.

But shortfalls in priority sector targets invite severe penalties under the current RBI guidelines. These guidelines prescribe that the shortfalls would have to be parked either with the Small Industries Development Bank of India or with the Rural Infrastructure Development Fund at bank rate of six per cent.

In order to avoid penalties, some foreign banks have begun activating their lines of credit with the public sector banks for funding their compliance with priority sector loan targets or taking them out. There were alternatives of resorting to the call/term money markets, but not all are prepared to take this route fearing asset liability mismatches. Almost all the foreign banks have credit lines with the domestic banks for meeting their rupee resource requirements

Banking sources said that few public sector banks were not interested in allowing the foreign or domestic new generation private sector banks to take out farm loans. This was particularly because farm loans have a very low delinquency rate as compared with retail or corporate loans. Even during peak drought situation farm loan delinquency has seldom exceeded two per cent.

In fact, for most domestic banks, non-performing asset ratio on agri loans is less than one per cent, which was better than housing loans, where it averages about four per cent.

Besides, farm loans earn a good spread for the domestic banking sector. Banking sources said that the spreads were easily about 5 per cent.

Consequently, bankers said that even if some of the PSBs, which have surplus priority sector loans decide to securitise and sell them to foreign or private sector banks, they would expect a substantial premium. This was particularly because some of them hope to capitalise on the sudden demand for these portfolios.

In fact, the effective pricing was likely to be in the region of about 8 per cent, yielding a premium of at least three per cent, the sources said.

This pricing, the bankers said, is likely to tighten further with the approach of the year-end deadline.

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To meeet priority sector lending targets — Foreign, new pvt banks move to buy out farm loans from PSBs

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