termiv mob priority sector lendings

7/29/2019 TERMIV MOB Priority Sector Lendings

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Management of Banks Section A

Priority Sector Lending Norms in

IndiaNationalized and Foreign Ba

Perspective

Abhishek Amber Amrita Anshul Apurba Arnab Devina Ra

PGP/15/65 PGP/15/68 PGP/15/69 PGP/15/71 PGP/15/73 PGP/15/74 PGP/15/82 PG

Presented by Group 4


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Descriptionof Priority

sectorsformalised

Banks toraise shareof PSL to33.33% by79

Further raisePSL to 40% by1985 Subtargets foragriculture andweak sectionsspecified

1971

1974

1980

Foreign banks > 20 branches :PSL -40 % of total adva

Education and home loans up to the specified limits, a

individuals for up to Rs 50,000 to clear debts of money le

be priority lending

Advances up to Rs 25 lakh in cities with population> 1Rs 15 lakh in other towns, will be priority lending

Parameters Domestic commercial banks

Total Priority Sector Advances 40%ANBC orCEA, whichever is higher.Sam

ban

Total agricultural advances

18 % of ANBC or CEA, whichever is higher .Indirect

lending >4.5% of ANBC is not considered under 18%

target,but agri advances-direct/indirect is computed

under 18%

No t

SSI advances Reckoned in overall PSL target of 40% 10%

Micro enterprises within SSI

40% of SSI advances tounits with investments in plant

up to Rs 5 lakh

20 per cent of total SSI advances should go to units

with investment in plant & machinery between Rs 5 lakh

and Rs. 25 lakh

(So,60%of SSI to the micro enterprises)

Sam

ban

Export credit Not a part of PSL for domestic commercial banks12%

CEA

Advances to weaker sections 10% of ANBC or CEA,whichever is higher No

Differential rate of interest

scheme

1% of advances outstanding of previous year. No less

than 40 % of advances granted under DRI scheme go to

SC/STs.

At least2/3rd of DRI advances should be granted

through rural and semi-urban branches.

No t

RBI ,July 20-2012

Categories of priority sector

Agriculture (Direct and indirect finance)

Small Scale Industries(direct & Indirect /finance)

Small Business/service enterprises

Micro Credit

Education loans

Housing loans

Investments in securitised assets representation loans to

agriculture and SSI

Priority Sector Lending :

Important role given by the Reserve Bank of India (RBI) to

banks for providing a specified portion of the bank lending to

few specific sectors like agriculture or small scale industries

Meant for all round development of the economy apart from

only focusing on the financial sector

Targets & Sub-targets

Introduction
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Categories

Domestic commercial banks

/ Foreign banks with 20 and

above branches

Foreign banks w

20 bran

Total Priority Sector 40 percent of Adjusted Net

Bank Credit (ANBC)

32 percent

Total agriculture 18 percent of ANBC or credit

equivalent amount

No specific targ

of total priority

Micro & Small

Enterprises (MSE)

Computed under the overall

priority sector target of 40

percent of ANBC or credit

equivalent amount

No specific targ

of total priority

Export Credit Not a separate category, to be

included under MSE and

agriculture

No specific targ

of total priority

Advances to Weaker Sections 10 percent of ANBC or credit

equivalent amount

No specific targ

priority sec

Before 20th July, 2012

After 20th July, 2012

Foreign banks having 20 or more branches in the country will be brought on par with domes

for priority sector targets in a phased manner over a maximum period of 5 years starting April 1,

The focus of the revised guidelines is on direct lending by banks and not through intermed

Non Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs).

The overall target under

priority sector is retained

at 40 percent

RBI Norms for Priority sector Lending (PSL)


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Foreign banks >20 branches:

Standard Chartered Bank94 branches

Hong Kong & Shanghai Banking

Corporation:

50 branches

Citibank42 branches

Royal Bank of Scotland31 branches

Problems in PSL: Do not have enough branches and manpower

Fear that loans may turn NPLS

Pathway for the banks:

Split their wholesale

and consumer

banking operations

and opt for a NBFC

structure

They will lose a

cheap source of

money i.e.

current and

savings deposits

Citis efforts to lend through Citicorp wasnt

exactly a success

The focus of the revised guidelines, b

recommendations of the M V Nair-led panel, is also

lending by banks and not through intermediaries

Banking Financial Companies (NBFCs) and HousinCompanies (HFCs), the RBI said. Foreign banks op

India as a locally-incorporated wholly-owned subsid

of a parent bank would be required to meet th

sector lending requirements on par with domestic b

RBI guidelines:

Priority Sector Lending: Foreign Banks Perspective

/


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PSL in Perspective of Nationalized Banks (1/4)

The share of priority sector NPAs in gross NPA

banks witnessed an increase in 2010-11. While

priority sector gross NPAs to priority sector advan

in public sector banks in 2010-11, it declined in

banks during the same period.

Credit to Priority Sectors

The priority sector lending witnessed a growt

2010-11. However, the growth of agricultu

decelerated to 9 % in 2010-11 as compared with 23% in the previous year. In 2010-11 also, at t

level, banks have lent more than 40 % of their AN

sectors. The sub-target prescribed for agricultu

ANBC was also achieved by banks in 2010-11.

i i f i li d k ( / )


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The limit for housing loans considered as a priority sector was increased from 20 lakh to

25 lakh for housing loans sanctioned by UCBs on or after April 1, 2011.

Loans (up to 50,000) to SHGs/ JLGs for agricultural and allied activities would be

considered as priority sector advances.

7 out of 26 public sector banks were not able to meet the priority sector lending target of

40 % of ANBC in 2010-11. Further, it is a concern that 18 out of 26 PSBs could not meet the

target set for agricultural advances in 2010-11. Among the private sector banks, only 1 bank

could not meet the priority sector lending target in 2010- 11. 10 private sector banks did

not meet the target set for agricultural advances in 2010-11.

It is important to note that more

the total credit of RRBs belonged

sector in 2010-11. Half of wh

agricultural sector

Share of agricultural credit in

witnessed a marginal decline in 20

agriculture, crop loans constituted

of the volume of lending.

Need for banks to conform to the p

sector lending target Non adheagricultural lending target by a la

banks raises concern as still a large

Indias population depends on th

sector for livelihood.


PSL i P i f N i li d B k (3/4)


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PSL i P ti f N ti li d B k (4/4)


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The share of agriculture under priority sector in total advances declined in 2011 as compared to the previous year UCBs advan

sectors constituted almost 46 % of total advances Need for further improving the efficiency parameters of the Indian Banks.

The NIM of the Indian banking system is higher than that in some of the other emerging market economies even after accountin

mandated social sector obligations such as priority sector lending and credit support for the Governments anti-poverty initiatives

In sum, the priority sector NPAs to priority sector advances was generally high in PSBs as compared with private sector banks.


I I PSL


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The direct impact will be an increase in private bankspriority sector sub segment shortfall vs. targets. Theseshortfalls have to be parked in low-yielding instruments.

The continuous change in RBI norms can impact margins

The percentage of bad loans in the priority sector hasbeen on an all time high

Rising Bad Loans

Actual margin impact may also vary based on RIDFsabsorptive capacity

Over the longer term, private banks will have to ramp-uptheir operations in the rural/semi-urban areas to ensurethat the priority sector obligations are met.

Longer-term implications are possible for operating &credit costs

For many large listed NBFCs, banks are a key fundingsource. These changes may have negative implicationsfor cost and amount of funding that NBFCs receive.

Collateral impact higher cost funding for NBFC

Priority sector lending is necessary to force banks to focus on rural areas but urban areas too have a priority sector problem. Th

urban areas are equally excluded and now that the migration is happening from rural to urban areas, it is going to become an

problem

Some Other Issues:

1. Bias against landless labourers: borrowing to b

for ones land is recognised under priority sector

agriculture loan while borrowing to purchase foo

consumption by a landless agricultural labourer

2. Income-based targeting for non-bank intermed

3. Discontinuous measurement of priority sector a

Issues In PSL

PSL and Inclusive Growth


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3 pillars of inclusivegrowth

MaximizeEconomic

opportunities

Ensureeconomic well

being

Ensure equalopportunitiesto economic

opportunities

1% increase in Agricultural output results in 2.5 times increase in income of lowest 3 deciles

Significant correlation found between agri output and Bank credit (except in Kerala, Haryana, J&K,Karnataka)

In the budget of 2012-13, target of agricultural credit was raised by INR 100000 cr to 575000 cr

0

2000

4000

6000

8000

10000

12000

14000

1 3 5 7 9 11 13 15 17 19 21 23 25

Per ca

credit

Per ca

Pondicherry (1973-74 to 1996-97)

PerPer c

PSL and Inclusive Growth

Priority Sector Lending: Impact on Profitability?


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SubsidizedInterest Rates

Forcefullending to

Priority Sector

Increase inminimum capfor PSL over

the years

High servicingcosts of large

number ofsmall accounts

Year Agriculture SSI Export Transport Retail Int. Inco

Total

1980 3.15 1.7 4.67 3.46 0.45 0

1990 2.64 0.53 3.94 1.55 -0.45 0

2000 1.39 0.02 0 0.31 0.31 0

Interest Rate Subsidy on Priority Sector (in

41.90%

20.40%

20.20%

17.50%

% of NPA

Non

Secto

Agric

SME

Average lending rate is below commercial lending ratebut higher than Prime Lending Rate/Base Rate

Post reform, the loss due to PSL is attributed to

increase in volumes rather than subsidy

Impact on Profitability due to

Priority Sector Lending: Impact on Profitability?


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Thank You

termiv mob priority sector lendings

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