Priority sector lending certificate good even for state-run banks: Moody's

The Reserve Bank of India's (RBI) guidelines on priority sector lending certificate is credit positive for even nationalised banks without expertise in lending to that sector, said credit rating agency Moody's Investors Service.

According to Moody's, the Indian central bank's move allowing banks to buy and sell such certificates and manage their priority lending portfolio is helpful.

"We expect this development to benefit banks with significant gaps in meeting their priority sector loan requirements, including Bank of India, Bank of Baroda and IDBI Bank Ltd. Their lending exposures will likely be streamlined to their core segments, improving operating efficiencies. Meanwhile, we expect that banks with priority sector lending surpluses will have additional contributions," it said

The RBI recently relased guidelines for priority lending certificates, under which banks can buy and sell priority lending credit certificates.

Generally a bank has to lend 40 percent of its loan to priority sectors - agriculture, education, social housing and others.

"Banks that did not meet this threshold were required to place deposits with the Rural Infrastructure Development Fund, which has comparatively lower yields and thus serves as a key disincentive for banks to fall below their priority sector lending targets," Moody's said.

With the introduction of priority sector lending certificates, banks without the ability to generate priority sector loans will no longer need to drive lending in this segment organically.

On the other hand, it can buy the certificate from banks that are majorly into this segment for a price.

As there is no transfer of credit risk, the funding requirement continue to be retained by the originating entity, Moody's said.

Currently banks that fall short of priority sector lending target, buys the portfolio from other lenders to fulill their obligations.