Participatory certificates get priority lending status

The Reserve Bank of India (RBI) has allowed private and foreign banks' to treat their investments in inter-bank participatory certificates (IBPCs) issued by public sector banks as direct lending to the priority sector.

Bankers feel this move will help them meet the target for priority sector lending (PSL). The priority sector loans of public sector banks act as the underlying assets for the IBPCs.

Currently, private sector and foreign banks are unable to meet the priority sector lending target as they do not have much of a presence in rural and semi-urban areas.

Classifying IBPCs as eligible for priority sector lending will also be beneficial for public sector banks and co-operative banks, having a vast network of branches in rural and semi-urban areas, to originate more priority sector loans and sell them down to their private sector and foreign counterparts via the IBPCs.

GV Nageswara Rao, chief executive officer, IDBI Bank, said "It will be beneficial for banks, which have been facing difficulties for them to meet priority sector obligations. The IBPCs market has witnessed shallow volumes, this will act as one more step to encourage banks invest in these instruments."

For instance, a bank missing the target can always buy out a piece of priority sector lending from a fellow bank which has "excess baggage" at a price for a month or so. Later, the second bank can buy back the portfolio. In banking parlance, this arrangement is called inter-bank participation certificate (IBPC).

Previously, investments made by scheduled commercial banks (SCBs) in special bonds issued by specified institutions such as state financial corporations (SFCs) / state industrial development corporations (SIDCs), Rural Electrification Corporation (REC), Nabard, Sidbi, National Small Industries Corporation Ltd (NSIC), National Housing Bank and Hudco, subject to certain conditions, were reckoned as indirect finance to agriculture/ housing.

However, with a view to rationalise banks' investments under PSL and encouraging banks to increasingly lend to the priority sector, the central bank announced in December 2004, that investments made by banks after April 1, 2005, in these bonds shall not be eligible for classification under PSL.

With regard to investments made in Nabard, investments in the special bonds issued by Nabard shall not be eligible for classification under priority sector lending with effect from April 1, 2007.

The existing RBI guidelines mandate that at least 40 per cent of the net bank credit be earmarked for certain designated sectors, which include exports, housing, rural and agriculture sectors.

The guidelines prescribe that at least 18 per cent of the net bank credit be earmarked exclusively for agriculture. For foreign banks, the priority sector lending target has been fixed at 32 per cent.