RBI's revised PSL norms: HDFC Bank, Federal Bank, IndusInd Bank to benefit

Augurs well for banks with relatively lower organic PSL generation

The revised priority sector lending (PSL) norms, announced by the Reserve Bank of India (RBI) on Monday aimed at improving credit flow into sectors like housing and clean energy, among others, will provide relief to some major banks, including HDFC Bank, RBL Bank, Federal Bank, and IndusInd Bank, to meet the targets organically. The revised norms will come into effect from April 1, 2025.

 

The PSL guidelines increased several loan limits, including housing loans; broadened the purposes based on which loans may be classified under renewable energy; and expanded the list of eligible borrowers under the category of “weaker sections”, while removing the existing cap on loans by urban cooperative banks (UCBs) to individual women beneficiaries.

 

According to a note by IIFL Capital, the enhanced coverage of the revised guidelines to improve bank credit flow to the priority sectors boosts financial inclusion and makes credit more accessible to weaker sections and women entrepreneurs.

 

“In addition to UCBs and HDFC Bank (need to gradually meet PSL on e-HDFC Ltd. book), the easing of PSL guidelines should help banks with relatively lower organic PSL generation (RBL Bank, IndusInd Bank, and Federal Bank), and are thus required to meet the shortfall via priority sector lending certificate (PSLC) purchase and/or invest in lower yielding rural infrastructure development fund (RIDF) which hurts margins,” the note said.

 

While the PSL guidelines have been revised, RBI has maintained the overall PSL target at 40 per cent of Adjusted Net Bank Credit (ANBC) for banks.

 

According to the IIFL Capital note, in financial year 2023-24 (FY24), RBL Bank, IndusInd Bank, and Federal Bank had a shortfall in organic PSL. IndusInd Bank and Federal Bank’s organic PSL as a percentage of opening calculated ANBC was 32 per cent and that for RBL Bank was 26 per cent.

 

As a result, RBL Bank recorded a net purchase of 6.4 per cent of domestic advances, while IndusInd Bank's net purchase stood at 0.9 per cent, SBI’s at 5.7 per cent, and ICICI Bank’s at 1.9 per cent, the note stated. Additionally, these banks have also invested in the Rural Infrastructure Development Fund (RIDF), with RBL Bank allocating 11.3 per cent of its opening ANBC to RIDF; Federal Bank at 6.2 per cent and SBI at 9.9 per cent.

 

According to analysts at Macquarie Capital, relaxations by the RBI are in the form of higher limits (e.g.: increasing pledge limit for agriculture produce), and increased sub-categories (e.g.: inclusion of direct purchase of agri produce, inclusion of transgender in weaker sections, etc.).

 

“While this circular individually does not impact fundamentals of banks to a large extent, in our view, this along with other measures taken indicate RBI's focus on having a more relaxed approach, which could help banks,” the report said.

 

Analysts said that with norms on several issues relaxed, banks can focus more on growth.

 

“The good part here is the RBI has been steadily relaxing norms and the latest is priority sector lending norms. Simple point is that banks now have more breathing space and can focus on growth,” said Suresh Ganapathy, head of financial services research, Macquarie Capital.

 

The RBI, under new governor Sanjay Malhotra, had earlier assured that the revised norms on liquidity coverage ratio will not come into effect for at least one year. These norms, which proposed additional run-off factors, were initially mooted to be implemented from April 1, 2025. Malhotra also said there is no timeframe to implement expected credit loss-based framework for provisioning. On project finance norms, he said banks will need more time of at least a year.