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Presented by Group 4
Abhishek PGP/15/65 Amber PGP/15/68 Amrita PGP/15/69 Anshul PGP/15/71 Apurba PGP/15/73 Arnab PGP/15/74 Devina PGP/15/82 Rahul PGP/15/105
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 1980 1974
Banks to raise share of PSL to 33.33% by ‘79
RBI ,July 20-2012
Foreign banks > 20 branches :PSL -40 % of total advances Education and home loans up to the specified limits, advances to individuals for up to Rs 50,000 to clear debts of money lenders, will be priority lending Advances up to Rs 25 lakh in cities with population> 10 lakh, and Rs 15 lakh in other towns, will be priority lending Targets & Sub-targets
Domestic commercial banks Foreign Banks
Same as domestic banks."REVISED 2012"
Description of Priority sectors formalised
Further raise PSL to 40% by 1985 Sub targets for agriculture and weak sections specified
Total Priority Sector Advances 40%ANBC orCEA, whichever is higher. 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%
Total agricultural advances
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
Export credit Advances to weaker sections
Micro enterprises within SSI
Reckoned in overall PSL target of 40% 10% of ANBC 40% of SSI advances tounits with investments in plant up to Rs 5 lakh Same as domestic 20 per cent of total SSI advances should go to units with investment in plant & machinery between Rs 5 lakh banks and Rs. 25 lakh (So,60%of SSI to the micro enterprises)
Not a part of PSL for domestic commercial banks 10% of ANBC or CEA,whichever is higher 12% of ANBC or CEA,whicever is higher No target
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. No target At least2/3rd of DRI advances should be granted through rural and semi-urban branches.
RBI Norms for Priority sector Lending (PSL) Before 20th July, 2012
Categories Domestic commercial banks / Foreign banks with 20 and above branches
40 percent of Adjusted Net Bank Credit (ANBC) 18 percent of ANBC or credit equivalent amount Computed under the overall priority sector target of 40 percent of ANBC or credit equivalent amount Not a separate category, to be included under MSE and agriculture 10 percent of ANBC or credit equivalent amount
Foreign banks with less than 20 branches
32 percent of ANBC No specific target. Forms part of total priority sector target. No specific target. Forms part of total priority sector target
Total Priority Sector Total agriculture
Micro & Small Enterprises (MSE)
After 20th July, 2012
The overall target under priority sector is retained at 40 percent
No specific target. Forms part of total priority sector target No specific target in the total priority sector target
Advances to Weaker Sections
Foreign banks having 20 or more branches in the country will be brought on par with domestic banks for priority sector targets in a phased manner over a maximum period of 5 years starting April 1, 2013 The focus of the revised guidelines is on direct lending by banks and not through intermediaries like Non Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs).
Priority Sector Lending: Foreign Banks Perspective
Foreign banks >20 branches:
Standard Chartered Bank Hong Kong & Shanghai Banking Corporation: Citibank Royal Bank of Scotland 94 branches 50 branches 42 branches 31 branches
The focus of the revised guidelines, based on recommendations of the M V Nair-led panel, is also on direct lending by banks and not through intermediaries like NonBanking Financial Companies (NBFCs) and Housing Finance Companies (HFCs), the RBI said. Foreign banks operating in India as a locally-incorporated wholly-owned subsidiary (WoS) of a parent bank would be required to meet the priority sector lending requirements on par with domestic banks
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
Citi’s efforts to lend through Citicorp wasn’t exactly a success
PSL in Perspective of Nationalized Banks (1/4)
The share of priority sector NPAs in gross NPAs of domestic banks witnessed an increase in 2010-11. While the ratio of priority sector gross NPAs to priority sector advances increased in public sector banks in 2010-11, it declined in private sector banks during the same period. Credit to Priority Sectors The priority sector lending witnessed a growth of 18 % in 2010-11. However, the growth of agricultural advances decelerated to 9 % in 2010-11 as compared with the growth of 23% in the previous year. In 2010-11 also, at the aggregate level, banks have lent more than 40 % of their ANBC to priority sectors. The sub-target prescribed for agriculture at 18 % of ANBC was also achieved by banks in 2010-11.
PSL in Perspective of Nationalized Banks (2/4)
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 than 80% of the total credit of RRBs belonged to the priority sector in 2010-11. Half of which is in the agricultural sector Share of agricultural credit in total credit witnessed a marginal decline in 2010-11 . Within agriculture, crop loans constituted almost 74 % of the volume of lending.
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.
Need for banks to conform to the priority sector lending target Non adherence to the agricultural lending target by a large number of banks raises concern as still a large proportion of India’s population depends on the agricultural sector for livelihood.
PSL in Perspective of Nationalized Banks (3/4)
PSL in Perspective of Nationalized Banks (4/4)
The share of agriculture under priority sector in total advances declined in 2011 as compared to the previous year UCBs ’ ad vances to priority 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 accounting for mandated social sector obligations such as priority sector lending and credit support for the Government’s anti -poverty initiatives. In sum, the priority sector NPAs to priority sector advances was generally high in PSBs as compared with private sector banks.
Issues In PSL
The continuous change in RBI norms can impact margins • The direct impact will be an increase in private banks’ priority sector sub segment shortfall vs. targets. These shortfalls have to be parked in low-yielding instruments. Rising Bad Loans • The percentage of bad loans in the priority sector has been on an all time high Actual margin impact may also vary based on RIDF’s absorptive capacity Longer-term implications are possible for operating & credit costs
• Over the longer term, private banks will have to ramp-up their operations in the rural/semi-urban areas to ensure that the priority sector obligations are met. Collateral impact – higher cost funding for NBFC
• For many large listed NBFCs, banks are a key funding source. These changes may have negative implications for cost and amount of funding that NBFCs receive.
Some Other Issues: 1. Bias against landless labourers: borrowing to buy a tractor for one’s land is recognised under priority sector as a direct agriculture loan while borrowing to purchase food for own consumption by a landless agricultural labourer is not 2. Income-based targeting for non-bank intermediaries 3. Discontinuous measurement of priority sector achievements
Priority sector lending is necessary to force banks to focus on rural areas but urban areas too have a priority sector problem. The poor in urban areas are equally excluded and now that the migration is happening from rural to urban areas, it is going to become an increasing problem
PSL and Inclusive Growth
3 pillars of inclusive growth
Maximize Economic opportunities Ensure economic well being Ensure equal opportunities to economic opportunities
Per capita priority sector credit Per capitra income Per Per capita capita income income
0 1 3 5 7 9 11 13 15 17 19 21 23 25
Pondicherry (1973-74 to 1996-97)
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
Priority Sector Lending: Impact on Profitability?
Impact on Profitability due to
Subsidized Interest Rates
Interest Rate Subsidy on Priority Sector (in %)
Agriculture SSI Export Transport Retail Int. Income Loss/ Total Assets
Forceful lending to Priority Sector
Increase in minimum cap for PSL over the years High servicing costs of large number of small accounts
% of NPA
Average lending rate is below commercial lending rate but higher than Prime Lending Rate/Base Rate Post reform, the loss due to PSL is attributed to increase in volumes rather than subsidy 17.50% 41.90% 20.20% 20.40%
Non Priority Sector
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