Opinion

Priority sector lending norms can be ‘met’ by paying for the deficit

S Kalyanasundaram | Updated on September 27, 2020 Published on September 27, 2020

Banks that are not able to lend under priority sector on their own, can make outright purchases of such lending from other banks and also buy Inter Bank Participation Certificates

During the last 60 years, the concept of priority sector lending (PSL) has undergone various changes, intending to improve the quantum and quality of lending to the targeted sectors. The recent change announced by the Reserve Bank of India is to remove the imbalance among different geographical areas.

The banks are having different targets under PSL with overall target and sub-targets under agriculture, micro-enterprises and weaker sections. Though most banks are reaching these targets, there is some imbalance in the geographical coverage. Banks also have some other alternatives to achieving these targets on their own. Banks who are not able to lend under priority sector on their own, can make outright purchases of such lending from other banks and also buy Inter Bank Participation Certificates (IBPC).

The RBI has decided to rank districts based on per capita credit flow to priority sector and build an incentive framework for districts with comparatively lower flow of credit and a disincentive framework for districts with a comparatively higher flow of priority sector credit.

From FY 2021-22, a higher weight (125 per cent) would be assigned to the incremental priority sector credit in the identified districts where the credit flow is comparatively lower (per capita PSL less than ₹6,000), and a lower weight (90 per cent) would be assigned for incremental priority sector credit in the identified districts where the credit flow is comparatively higher (per capita PSL greater than ₹25,000).

Accordingly, 205 districts are classified as ‘high PSL credit’ eligible for 90 per cent weightage and 184 districts are classified as low ‘PSL credit’ eligible for 125 per cent weightage. The remaining districts will continue to have an existing weightage of 100 per cent.

Each district draws an Annual Action Plan and this includes targets under different priority sector credit and each district is assigned to a bank under Lead Bank Scheme. The primary responsibility to reach the priority sector target for the district is with the Lead Bank with the help of other banks and district administration.

Does this not automatically take care of the districts, which are under lesser priority sector lending coverage?

Counterproductive

Growth of each district is important. But, at the same time, the progressive districts must also march on. If this new incentive is implemented, then banks will be reluctant to lend in Tamil Nadu, Kerala, Karnataka or Punjab, where all the districts are already under high PSL credit. Politically, the State governments may object to this implementation. There are also States such as Maharashtra and Haryana where just one district is under low PSL. The new initiative will be counterproductive for such States. Let us not punish some districts/States as a whole for the successful lending under priority sector so far.

It is now permitted to transfer assets through direct assignment/outright purchase by banks representing loans under various categories of priority sector to make the buying banks to show as priority sector lending (subject to conditions).

Likewise, under the IBPC, the buying banks can show these as part of priority sector credit. It needs clarity whether these instruments will also be with 90 or 110 per cent of the exposure based on the district where the original lending is made.

The writer is a retired banker

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Published on September 27, 2020
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