Priority sector norms set to be reviewed

Announcement likely in Budget; more flexibility to foreign banks on cards

To offer more flexibility to lenders, the Reserve Bank of India (RBI) is set to revise the priority sector lending norms in order to make the targets more achievable for banks.

A formal announcement on the issue will be made by Finance Minister Arun Jaitley during the Budget speech. The new norms are expected to give more flexibility, particularly to foreign banks that are constraint by branch presence to meet their targets.

RBI had set up an internal committee, headed by a chief general manager from the department of banking regulation (DBR), to review the changes that were required. According to sources, the banking regulator and the ministry have discussed the issues that need to be addressed.

It is likely the definition of priority sector will be expanded. At present, lending to agriculture sector — both direct and indirect — constitutes priority sector lending. It is proposed the entire gamut of agricultural infrastructure development activity, like construction dams, canals and rural roads, be considered under the priority sector.

Moreover, banks have also been demanding overall  lending to sectors like infrastructure be included under the ambit of priority sector. This is because the quantum of loans is higher under infrastructure as compared to agriculture and, therefore, it will be much easier for banks to meet the norms.

Banks have also asked the amount of loans that qualify as PSL under housing be raised by at least Rs 10 lakh. Currently, loans to individuals up to Rs 25 lakh in metropolitan centres with population above one million and Rs 15 lakh in other centres for purchase/construction of a house per family excluding loans sanctioned to bank’s own employ qualifies as priority sector lending.

Currently, under PSL obligation, banks are required to lend 40 per cent of their adjusted net bank credit of the previous year to sectors such as-agriculture, micro and small enterprise, housing and education, among others. Of the 40 per cent, 18 per cent is the target for agriculture of which 13.5 per cent needs to be for direct agriculture.

If a bank fails to meet its target, it invests in low-yielding assets like funds with the National Bank of Agricultural and Rural Development’s Rural Infrastructure Development Fund (RIDF).

With expansion of the definition of the priority sector, investment in RIDF will not be considered under PSL. It is argued RIDF investments are intended only to address non-compliance and also the proceeds are made available to state governments, which are not credit constrained and could raise money from market sources.

Relaxation in PSL norms will also provide a much needed breather to foreign banks. It is proposed that credit facilities such as bonds or Pass-Through Certificates should be permitted to be held in the books of a bank. Foreign lenders are expected to benefit if this proposal is implemented.

The changes in PSL norms could pave the way for the foreign lenders to take up the wholly owned subsidiary (WOS) route in India. This has been one of the biggest reservations of lenders who are looking at converting their branches into a WOS, as they believe it won’t be commercially viable.