Small Finance Banks (SFBs) may look to sell surplus priority sector loans (PSLs) and increase the proportion of non-PSL loans, such as unsecured personal loans and loans against property within their overall portfolio, as the RBI has relaxed the PSL norm.
The central bank has lowered the PSL target for SFBs to 60 per cent of their loans from the current financial year from 75 per cent earlier. This comes at a time when their microfinance portfolio, which is classified as PSL, is facing asset quality pressures.
PSL for banks comprises loans to agriculture, MSMEs, export credit, education, housing, social infrastructure, renewable energy, weaker sections and other segments.
R Baskar Babu, MD & CEO, Suryoday Small Finance Bank, said: “Majority of the SFBs are well above the 75 per cent PSL target at this point of time. So, relaxation of this target will release some of the excess PSL, which banks will be able to sell via priority sector lending certificates/PSLCs (to banks facing PSL shortfall), resulting in some income, though not substantial.
“What the change in the PSL norm certainly does is that it will help SFBs, enabling them to create a little more robust, diversified lending model, whereby we could venture into segments such as personal loans to salaried customers and loans against property.”
SFBs‘ priority sector lending portfolio (including lending to weaker sections, micro-enterprises, agriculture, non-corporate individual farmers, and small and marginal farmers) amounted to 90.6 per cent of their overall portfolio as of March-end 2024, per RBI data.
PSL target
The RBI formulated the PSLC scheme to enable banks to achieve the PSL target and sub-targets by purchase of these instruments in the event of a shortfall. At the same time, the scheme incentivises banks with excess portfolio, encouraging them to originate and sell via these instruments. These certificates are sold/bought in standard lot size of ₹25 lakh and multiples thereof.
Banking expert V Viswanathan opined that the relaxation in PSL norm may encourage SFBs to open more branches in metro and urban locations, where the scope for non-priority sector lending is high.
“Under the non-PSL category, SFBs may focus on retail segment, including personal gold loans, auto loans and unsecured personal loans. They may even partner with other banks for issue of co-branded credit cards,” he said.