Priority Sector Lending

Microfinance India conference

9 October 2007
N.Srinivasan
 Don’t be hasty;
You can take a
loan that Is just
like loot. Nobody
repays
Hands ABC Bank
up Branch manager
 The logic of PSL
• Constraints in credit flow to sectors which
support a large number of livelihoods
• Preference for industry, commerce, trade
and security based financing
• Banks must support vulnerable and
unglamorous sectors also
• Banking as a public utility?
• Credit as a universal service obligation?
 History so far
• Introduced in 1969
• Quantitative targets brought in 1974
• Stipulation of 40% target in 1985
• Narasimham committee I on financial
sector reforms did not favour continuation
• Narasimham committee II on financial
sector reforms favoured continuation
• Recent review by RBI internal Working
Group in 2005 supported continuation
 Changes in the environment
• Agriculture less significant in contribution
to national income
• Rapidly expanding service sector
• Financial sector reforms – emphasis on
profitability of banks
• Greater private ownership of banks
• Large expectations from banks – by
people and govts
 Norms - target
Category Domestic Banks Foreign Banks

Total P S 40 percent of 32 percent of ANBC

advances ANBC*

Agri credit 18% of ANBC No target

SSI No specific target 10 percent of ANBC

Export credit Not part of PS 12 percent of ANBC

Advances to 10 percent of ANBC No target

weaker sections
 The norms – sectors and type of loans
• 1. Agriculture
• 2. Small scale industries
• 3. Small road and water transport operators
• 4. Small business
• 5. Retail trade
• 6. Professional and self-employed persons
• 7. State sponsored organisations for SC/ST
• 8. Education loans
• 9. Housing.
• 10. Consumption loans for weaker sections
• 11. Loans to SHGs and NGOs for onlending to SHGs
• 12. Loans to the software industry
• 13. Loans to food and agro-processing sector
• 14. Investment by banks in venture capital
Priority sector loans by commercial banks – outstanding
(Rs crore)

1969 1991 2001 2005 2006 2007

Agri 162 16750 51922 125250 172292 230180

SSI 257 17181 56002 74588 90239

Others 22 8984 46490 181638 247379

Total 441 42915 154414 381476 509910 632647

 Present status
Share (%) of different sectors in credit

1969 1991 2001 2005 2006

Agriculture 36.73 39.03 33.63 32.83 33.79
SSI 58.28 40.03 36.27 19.55 17.70
Others 4.99 20.93 30.11 47.61 48.51
Total 100 100 100 100 100
Changes in norms and their impact
• Inclusion of more sectors – banks enlarge
OPS portfolio 4% in 1969 – 48% in 2006
• Raising of ceiling limits of loans and units
– preference for larger loans (small loan
accounts decline by 26 lakh between 1992
and 2004)
• Interest rate ceilings on small loans –focus
shifts to on large loans (average loan size
Rs 1.17 lakhs)
 Quality of compliance
Changes in composition of PSL

100%

80%

60%
% share to total
40%
20%

0%
1969 1991 2001 2005 2006
Years

Agriculture SSI Others

 Quality of compliance
• Targets achieved at bank level
• Some states and regions underfinanced
• Agriculture sub-targets ensure sustained
share in flow – SSI sector suffers
• Indirect finance and investment in bonds
of SIDBI and RIDF of NABARD preferred
• Small loans - not a priority
• Monitoring requires improvement to
ensure quality of compliance
 Problems of banks
• Stringent prudential standards
• Interest rate and pricing
• Collateral requirements
• Borrower selection – govt sponsored
programmes
• Network and staffing constraints
 Priority sector and inclusion
• PS can facilitate achievement of inclusion
agenda
• Focus to shift from underserved sectors to
underserved people
• States/regions with lower intensity of
coverage to be prioritised
• Microfinance would be a critical tool in
inclusion
 Microfinance –an alternative to PSL?

• 29 lakh SHGs covered

• Credit flow of Rs 6640 crore last fiscal
• Network constraints of banks make
microfinance an ideal option for PSL
• Facilitator model could provides the means
• But microfinance is not a substitute to PSL
• Loan volumes about 1% of PSL portfolio
 Rural Infrastructure Development Fund
• Mechanism of investing shortfalls in PSL
• Remunerative in the beginning
• Penal element – low interest rates- introduced
subsequently
• Allocations for deposits not met – gap of Rs 25000
crore
• By 2007, allocations for 2003-04 were met
• No remedial action taken
• New Deposits not reckoned as PSL from April 2007
Deposits and Disbursements under RIDF (Rs. crore)

Year Deposits Disbursements Allocation

1995-96 350.00 387.34 2000
1996-97 1,042.30 1,087.08 2500
1997-98 1,007.04 1,009.03 2500
1998-99 1,337.95 1,313.12 3000
1999-00 2,306.63 2,277.87 3500
2000-01 2,653.64 3,176.85 4500
2001-02 3,590.72 3,790.37 5000
2002-03 3,857.09 4,103.42 5500
2003-04 2,158.69 3,922.09 5500
2004-05 4,353.47 4,316.85 8000
2005-06 6,092.37 5,953.32 8000
2006-07 6,966.43 6,222.58 10000
Total 35,716.33 37,559.92 60000
 Recent changes

• Adjusted net bank credit (net bank credit + govt

security investment held to maturity) as of previous
year end as the basis
• Investment in securitised assets with underlying
PSL loans reckoned
• PSL portfolio purchase reckoned
• Participation certificates (risk sharing) with
underlying PSL reckoned
• Loans to NGOs/MFIs for on-lending reckoned
• Fresh deposits with NABARD/SIDBI not reckoned
 The road ahead
• Reasons exist for continuation
• Recent changes likely to improve credit-flow and
quality of compliance
• Restrictions on banks’ autonomy should be
withdrawn
• Facilitators to play a key role
• Banks with network and staff would be able to
sell portfolios, securitised assets and IBPCs
• Cooperative banks and RRBs could benefit
through portfolio sales
• MFIs likely to benefit with more bank credit
• Microfinance will get a boost
 Conclusion
• Time for review of targets of each sector
• People and regional focus needed
• Inclusion objective to be integrated with
PSL
• Tighter monitoring and effective
enforcement
• Need for a sunset clause – with
achievement of full financial inclusion?
Thank you

for the patience