PSLC – Step Towards Efficient Inclusive Banking – Niteen, IIM Calcutta

‘RBI issued instructions on trading in Priority Sector Lending Certificates (April 7, 2016) and a platform to enable trading in the certificates through its core banking solutions (CBS) portal (e-Kuber). All Scheduled Commercial Banks (including Regional Rural Banks), Urban Co-operative Banks, Small Finance Banks (when they become operational) and Local Area Banks are eligible to participate in the trading’.

Introduction : Banks are required to lend 40 per cent of their advances to priority sectors, which also include agriculture, education and housing. There are also sub limits to various categories which keep changing frequently based on RBI guidelines. Many banks fail to achieve the limit as well as sub limits and quite a few banks overachieve. In order to encourage efficient, economies of scale lending with specialization in particular segments, RBI has decided to allow trading between banks of these lending. RBI has also removed distinction between direct and indirect lending to agriculture, re-introduced export credit within priority sector. These instruments would provide a mechanism for banks to specialize in certain segments of priority sector and leverage on their comparative advantage to drive down cost of lending.

Classification: Four kinds of PSLC’s, namely PSLC – Agriculture, PSLC – Small & Marginal Farmers, PSLC – Micro Enterprises and PSLC – General can be bought and sold via the platform. The certificates will have a standard lot size of Rs. 25 Lakh and multiples thereof. There will be no transfer of credit risk on the underlying. The seller of PSLC, if it is a bank, will take it off its priority sector lending requirements even though it continues to carry the loan on its book.

Objectives: PSLCs will provide a market-driven incentive for efficiency and enable banks to sell their surplus lending and thus earning a premium for their efficiency/geographical spread. So far total credit extended by banks in priority sector lending is Rs 21,54,356.29 crore (March 2015). In addition to micro and small enterprises, medium enterprises are also proposed to be brought in the ambit of PSL. The pace of securitization might be adversely affected by the new priority sector lending (PSL) rules, according to ICRA. Banks would find it easier to meet PSL targets on their own. Banks can now factor in current market scenario and lend on the lines of their overall strategy and capability.

Sector Outlook: Between 2001 and 2011, the small borrowal accounts to agriculture – with borrowings below 50,000 per borrower farmer declined, both in terms of number of accounts and amount lent. In terms of number of accounts, the decline was from 92.7% to 61.3% and in terms of amount outstanding, from 44.1 to 18.2%. According to the Reserve Bank of India (RBI)’s annual report, PSBs could meet only 37.3 per cent of their target in 2015. In 2014, they had met 39.4 per cent of the total target whereas in 2013, state-owned lenders could meet 36.2 per cent of the total target.

As per RBI guidelines on RIDF deposits, the interest paid on bank deposits varies from bank rate minus 2% to bank rate minus 5% depending upon the shortfall in priority sector lending which currently ranges from 7% to 4% (gross). RIDF corpus at 20,000 crore for the year 2013-14 constitutes only a minor portion (12.7 %) as compared to the priority sector shortfall by public and private sector banks at Rs 1.35 lakh crore and Rs 0.22 lakh crore based on the data on priority sector lendings by banks as published in RBI Annual Report 2012-13.

As MFI loans qualify under ‘agriculture’ and ‘weaker sections’ categories of PSL, it has emerged as preferred asset class for bankers to meet their PSL targets. Further, MFIs have demonstrated superior performance in asset quality. The share of MF loan portfolio in aggregate securitization volume jumped from 32.5% in FY15 to 40% in FY16.  However, last year eight micro finance companies were given an in principle approval to become small finance banks. A decline in securitisation by these new banks would result in slower issuance of these securities in the current fiscal year compared to last year.

Securitisation of microfinance loan receivables done by issuing pass-through certificates (PTCs) or via direct assignments grew 125 percent to around Rs 11,500 crore in financial year 2015-16. This stood at Rs 5,075 crore in the fiscal 2014-15. The overall securitisation market may have grown by 60 per cent to an estimated Rs 70,000 crore in 2015-16.

Inference : Private sector banks will be biggest beneficiaries (due to their limited rural presence) because they can now lend to sectors which are commercially viable. Therefore, no bank can issue PSLCs of more than 50 percent of last year’s PSL achievement or excess over the last year’s PSL achievement, whichever is higher. However, there would be no limit on the amount of PSLCs that could be purchased for achievement of various targets. Essentially, the PSLCs will be a market-driven interest subsidy to those who make priority sector loans.



About the Author:


I am a graduate of NIT Karnataka, Surathkal; currently studying at IIM Calcutta. I believe in the concept of sonder and onism; hence have a penchant for movies, novels which give a refreshing perspective of society and our colossal history.  I have an itchy brain but lazy feet, well except while playing football. Basically, just another ‘brick in the wall’ trying to increase gross national happiness index. My bluetooth name and wi-fi password is Invisible Hand. I am also fondly  called as “Batman” “Idly” “South Indian Alan”.

Niteen Bali

Student at Indian Institute of Management, Calcutta