Export credit can be revitalised if it is reinstated as a separate priority sector category for banks, especially foreign banks, says a study supported by the UK Government.
This could lead to foreign banks operating in India expanding their lending to the export sector, thereby having a positive impact on India’s exports and GDP, the study titled ‘Re-prioritising priority sector lending in India’, states.
Priority sector lending has played a critical role in stimulating exports. However, credit supply to exporters needs to be increased further, says the study conducted by Nathan Associates Inc.
Following the 2012 revision in guidelines for priority sector lending, foreign banks with more than 20 branches are not required to lend to the export sector.
This is expected to have had a dampening effect on the growth of India’s exports, as the revised guidelines required large foreign banks (with over 20 branches) — Standard Chartered, Citibank India and HSBC — to direct credit to agriculture but not exports.
This dried up export credit to export-oriented sectors, thereby affecting exports and GDP, the study concludes.
It is estimated that a 1 per cent fall in priority sector lending to the export sector will reduce the export GDP by 0.76 per cent. “India is facing a rising current account deficit and an export-led growth strategy could help it reverse the trend; reducing credit available to the export sector will only thwart the solution,” says the study.
RESET TARGETS One size does not fit all when setting priority sector lending targets. Public, private and foreign banks must be assigned targets that conform to their business models to ensure that efficiency of the banking sector is not adversely affected.
Requiring all banks to lend 18 per cent of the priority sector lending targets to agriculture is not an efficient way of directing credit to agriculture, the study explains.
Foreign banks — irrespective of their branch network — should not be required to lend to agriculture under the priority sector lending norms. This is because foreign banks have neither the expertise nor the wherewithal to lend to the sector.
The revised priority sector guidelines that subject foreign banks with more than 20 branches to the same lending requirements as domestic banks are not rational.
To meet those requirements, foreign banks will have to open more branches.
The cost of securing regulatory approval to establish new branches, coupled with the high opportunity cost of lending to a less productive sector, such as agriculture, will discourage foreign banks from expanding, especially those close to the 20-branch threshold.
Include other sectors India should look at including infrastructure, energy (especially renewable energy), healthcare, water supply and agriculture research and development as priority sectors.
Loans to the “long-gestation” energy sector might turn into productive assets for banks after three to four years but would be cheaper to service because of lower transaction and customer acquisition costs.
Likewise, sectors such as infrastructure, healthcare and energy are strategic for the improvement of rural infrastructure, growth in the agricultural sector and ultimately, competitiveness of the Indian economy, the study said.
srivats.kr@thehindu.co.in