Time to shift priorities

The year 2019 signifies the 50th year of setting up the priority sector portfolio of banks in the post-nationalisation era. Regulatory capital, recapitalisation of banks, relook at the BASEL III, improving the access to credit for MSMEs are all on the agenda now.

Even the developed nations such as the US and European Union (small enterprises and small businesses), developing nations like China, the Philippines, Pakistan, Brazil and Russia (agriculture, rural industries and small enterprises) adopted interventions, ranging from administered interest rates, refinance and guarantee programmes, either in isolation or together. Priority sector lending (PSL) is one of the longest serving directed lending programmes in the world, defeating the argument that such prioritisation is an inefficient allocation of capital.

A host of committees set up by either the RBI or the Centre have all examined the targets and sub-targets from time to time, but such priorities were diluted in favour of commercially viable lending activities. Contributions to Rural Infrastructure Development Fund and SIDBI bonds compensated the failure to reach the targets by banks. These two, in a way, are licensed compromises for failures in PSL.

The Deepak Mohanty (2015) Report of RBI says that 43 per cent of those pursuing agriculture do not have access to a bank account, notwithstanding the Jan Dhan Yojana. With banks moving ahead with commercialised agriculture — organic farming, nature farming, horticulture, poultry and commercial dairies — small agriculturists have been sidelined.

Those that fail in targets can buy tradable certificates of participation, or Priority Sector Lending Certificates. The PSLCs are issued to a registered lender, for example microfinance institutions, cooperative banks, banking correspondents, for the amount of loans not issued to the eligible categories. This is a tacit recognition that all banks do not have equal abilities to lend to priority sectors.

Although the scheme does not allow ‘secondary trading’ of the PSLCs, they are an incentive for those that do not pick up targets under priority sector, and not for those who outperform them.

It has also been felt that increasing the supply side would provide greater access to credit by the farmers and MSEs. Small finance banks took birth although such institutional interventions in the past, like the RRBs, have only marginally succeeded.

IFC-World Bank estimates that there is a gap of 27 per cent in MSME lending and this would be wider if medium enterprises are excluded from the calculations. While access to credit to this sector is being examined by a recently appointed high-level committee of the RBI, it is important that this sector also needs to be redefined on two parameters — turnover and employment keeping in view its employment orientation.

As share of infrastructure will continue to crowd out priority sector lending, linking both infrastructure and priority sector lending to adjusted net bank credit would be counter-productive.

A refocus is also called for on account of the fact that both small farmer and marginal farmer credit and MSME credit displayed low NPAs at less than 8 per cent per annum for the last four years. The government should also desist from creating loan products. It can appoint a committee of bankers to devise suitable loan products for those sections that need a special dispensation.

Nabard and SIDBI should be restructured to serve their intended statutory objectives instead of dealing in thinly spread products, losing focus on the target groups.

The writer is an economist and risk management specialist. Views are personal

COMMENT NOW