Disallows capital for going to low-yield assets, wants details of priority lending plan this year.
The Union finance ministry has asked public sector banks (PSBs) not to invest in low-yielding assets, saying capital should be used judiciously to ensure optimal return. This comes after seven PSBs missed priority sector lending targets for 2010-11.
To meet the shortfall in this target, banks have been parking their funds in the Rural Infrastructure Development Fund (RIDF) of the National Bank for Agriculture and Rural Development for a return of four to five per cent. They could earn 10 per cent if they extended credit to agriculture or the sectors coming under the priority sector category.
| SHORTFALL Public sector banks which missed priority sector lending target for 2010-11 |
| * Andhra Bank |
| * Bank of Maharashtra |
| * Central Bank of India |
| * Corporation Bank |
| * UCO Bank |
| * Vijaya Bank |
| * IDBI Bank |
Last week, the government informed PSBs that it’d infuse more capital by March 31 and suggested they get ready the necessary approvals from their boards and the regulatory authorities. Bankers say the government has also reminded banks that capital is expensive and should be used optimally.
“The government has asked banks to refrain from investing in low-yielding assets, like the RIDF, in which banks invest to meet the shortfall in priority sector targets,” said the chairman of a PSB.
According to Reserve Bank of India norms, 40 per cent of banks’ adjusted net bank credit has to go to the priority sector, of which 18 per cent should be direct lending to agriculture. In 2010-11, seven of the 26 PSBs (including five associate banks of State Bank of India) could not achieve their priority sector lending target and 18 could not meet the target set for agricultural advances. Interestingly, barring one, all private sector banks have met their priority sector targets.
According to RBI data, though priority sector lending saw growth of 18 per cent in 2010-11, that in agricultural advances decelerated to nine per cent as compared to 23 per cent in the previous year. In 2009-10, only two PSBs missed the targets and in the year before that, only one had done so. In 2007-08, all PSBs met the target.
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The government has also asked for a detailed plan from banks on how they would be achieving these targets in the months ahead. Some of the banks have requested to be allowed to do so in phases.
By March 31, the government plans to infuse Rs 16,000 crore in PSB equity, including Rs 6,000 in the country’s largest lender, State Bank of India. The capital infusion would enable the government to have a minimum 58 per cent stake in its banks and also ensure PSBs have tier-I capital of eight per cent.