New PSL norms may not be an immediate game changer for banking sector

Given the systemic risk aversion, credit growth may take a few quarters to revive on the back of these norms

Friday saw the Nifty Bank index slide 2.2 per cent, despite the Reserve Bank of India (RBI)’s move to broad-base the canvas under priority sector lending (PSL).

Investors usually welcome the opening up of new growth avenues in the banking sector. However, this has been a deviation from the norm.

While the overall gloomy market conditions may have caused the index to brush aside the announcement, the larger question remains as to whether this is enough for banks to shed their risk aversion as far as lending operations are concerned.

Siddharth Purohit of SMC Capital doesn’t feel so. At the current juncture, most analysts, including Purohit, say banks may not turn experimental on their lending practices.

Preserving capital remains key. Hence, for the new segments under the PSL fold — start-up loans, loans to farmers for installation of solar power plants, loans for setting up compressed biogas plants — as well as enhancement of lending limit for loans to renewable energy sector, contract farming and health infrastructure, it may take a while to benefit from the RBI’s circular.

 

 

What’s more, the behaviour of private and public sector banks (PSBs) towards PSL loans is different. As Purohit explains, private lenders do not lend just to meet PSL targets. Instead, they procure vehicle loans, auto loans, and MFI loans (lent by microfinance institutions) to meet their targets.

“This practice may continue, and hence, they may remain reluctant to lend to new segments,” he says.

PSBs are more proactive in meeting their PSL targets and hence, the inclusions could certainly open up new avenues. Over a period of time, these could add to their loan books. However, in the near-term, they are expected to be cautious lending to these pockets.

A bulk of bad loans come from renewable power projects, mainly solar, in which projects have turned unviable owing to the crash in power procurement prices.

Likewise, exposure to agriculture comes with the risk of loan waivers, as seen in the past, and non-performing assets in this segment were quite high for PSBs (8-10 per cent) until FY19.

Loans to start-ups are akin to MSME (micro, small and medium enterprise) loans, where bad loans are also steadily rising. “PSBs’ past experiences may force them to remain careful and, hence, the circular may not have an immediate bearing on credit approach,” said another analyst with domestic brokerage.

Moreover, for lending to start-ups, banks will have to put in place a robust mechanism, given start-ups have limited collateral and a performance track record to offer. Though the intention of the RBI — to propel credit for the undeserved categories — is laudable, the timing of the circular may limit immediate success.