Large foreign banks in the country are grappling with the revised priority sector lending targets as these lenders do not have adequate branch presence to meet the new guidelines. Many of them fear stress on their profitability as their risk management frameworks are not customised to manage farm loans and advances to weaker sections of the economy.
“We have priority sector targets in many countries where we operate. But in India, the challenge is different. The regulator wants us to lend to sectors where we have limited or no expertise,” said a senior executive of a large foreign bank, who did not want to be named. “Our processes are not in tune to manage the risks in these portfolios. It’s going to be difficult to meet these new guidelines.”
On Friday, the Reserve Bank of India (RBI) released the revised guidelines on priority sector lending, which mandated higher target for foreign banks with 20 branches or more in the country. These banks need to lend 40 per cent of their net credit to the priority sector instead of 32 per cent earlier. They will also have sub-targets and get five years time (starting from April 2013) to meet the new guidelines.
- Standard Chartered Bank: 94 branches
- Hongkong & Shanghai Banking Corporation: 50 branches
- Citibank: 42 branches
- Royal Bank of Scotland: 31 branches
Typically, priority sector lending includes small value loans to farmers for agriculture and allied activities, loans to micro and small enterprises and other low income groups.
Bankers were not willing to speak on record due to the sensitivity of the issue. On condition of anonymity they said RBI needed to liberalise its branch licensing policy for foreign banks to allow them meet the revised priority sector guidelines.
“We are all for economic development. But we will urge RBI to broaden the definition of the priority sector. Otherwise, we will have to serve segments where we have no expertise, said a senior banker with another large foreign bank. “It is like throwing away money blindly and hoping it will come back.”
Currently, four foreign banks — Standard Chartered Bank, Hongkong and Shanghai Banking Corp, Citibank and Royal Bank of Scotland — have more than 20 branches in India.
For foreign banks with less than 20 branches, the priority sector target has been kept unchanged at 32 per cent with no sub-targets.
Bankers argued most foreign banks fail to meet the priority sector target of 32 per cent due to limited branch network and hence, increasing the target will only add to their woes. “How do we find a borrower in a rural village unless we have our feet on the ground,” questioned a banker with another foreign bank.
A few bankers also said foreign lenders that have less than 20 branches may rework their expansion strategy in India because of the tough priority sector guidelines. “You may find that having 19 branches is better than having 25 branches. This is because your target will be less and there will be no sub-targets,” another banker said.
Foreign lenders that have close to 20 branches are Deutsche Bank and DBS Bank. While Deutsche Bank has 16 branches and one unused branch licence, DBS Bank has 12 branches in India.
Also, capital may be a constraint for some of these lenders as their global head offices may not be too keen to invest in businesses where returns are low.
“It’s clear to everybody that the priority sector is not a high margin business. So, expanding this business will increase our costs and reduce the returns. Globally, banks are looking to conserve capital and the head offices may not be keen to invest in operations where returns are falling,” said another banker.
He added foreign banks would need to raise funds at lower cost to drive growth in assets where margins are low.
“The solution is liberalising the branch licensing policy. That will allow us to raise more deposits and give access to cheaper funds.”
Bankers said they would urge RBI to allow more foreign bank branches while submitting their action plan for achieving the revised priority sector targets.