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New PSL norms not encouraging enough to take WoS route: Foreign Banks

Easing of priority sector norms were key to enable foreign lender to convert their branches in subsidiaries

Nupur Anand  |  Mumbai 

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Foreign lenders seeking a change in priority sector lending (PSL) norms are disappointed by the steps taken by the government in the Union .

Easing of PSL norms was key to enable a foreign lender to convert its branches into subsidiaries, as desired by the banking regulator..

Read our full coverage on Union Budget The finance ministry has included loans to several other sectors, including agri-processing and agri-infrastructure, medium enterprises, renewable energy, under PSL. Infrastructure has also been included, albeit with a rider — loans up to Rs 5 crore for social infrastructure (schools, hospitals, etc.,) will be included under PSL but only in towns with population less than 100,000.

Foreign banks had asked for infrastructure to be included without any riders. The lenders had also asked for exports to be included in PSL.

These new norms were expected to give more flexibility, particularly to foreign banks constrained by branch presence, to meet their targets. However, bankers feel these might not be enough.

A foreign bank executive pointed out that even though infrastructure has been included, the existing clause limits the scope.

Another foreign bank executive said: “We had asked that banks be allowed to play up to their strengths as far as meeting PSL norms are concerned. However, the recommendation does not cover that. It has expanded the definition of what constitutes a PSL but it may not be enough to move the needle for foreign banks.”

Meeting PSL targets had been one of the biggest reservations of lenders, who are looking at converting their branches into wholly-owned subsidiaries (WoS), as they believe these won’t be commercially viable.

Under PSL obligation, banks are required to lend 40 per cent of their adjusted net bank credit of previous year to sectors such as agriculture, micro and small enterprises, housing and education, among others. The current cut-off for foreign lenders in the PSL segment is 32 per cent (foreign banks with more than 20 branches, it is 40 per cent). But once banks take the WoS route, they will have to achieve 40 per cent within five years.

They believe the changes made in PSL are in the right direction but are not enough to prompt any bank to take up the WoS route.

Shinjini Kumar, leader-banking and capital markets, PwC India, said: “With the new norms, the effective constraints reduce and it becomes a business opportunity that can be evaluated against branch expansion. However, I still do not see that as enough incentive until banks have more support from home countries on India plans based on real growth and opportunity and certainty of policy.”

However, lenders are still hopeful that in the final guidelines issued by the Reserve Bank of India, their demands of more sectors might be included.

  • Agri-processing & agri-infrastructure to be included in PSL
  • Loans to Medium Enterprises and renewable energy sector to be included
  • Lending of upto Rs.5 crore for social infrastructure for towns of less than 1 lakh population.
  • Progress made on PSL to be monitored quarterly and not at the end of the year
  • Source: Finance Ministry

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First Published: Mon, March 02 2015. 00:43 IST