PSBs presage target shortfall

FALLOUT OF PROPOSED PRIORITY SECTOR LENDING GUIDELINES

Public sector banks (PSBs) fear that the proposed revision in priority sector guidelines, if implemented, would lead to a shortfall in meeting targets.

"The proposed guidelines are likely to compound the problem (of meeting priority lending obligations) further," said head of a planning at a public sector bank. PSBs as a group had failed to meet the sub-targets for lending to agriculture and weaker sections in 2005-06.

Indian banks have been set a priority sector lending sub-target of 18 per cent of net bank credit (NBC) for agriculture and 10 per cent for weaker sections, within the overall priority sector target of 40 per cent. Priority sector lending of public sector banks increased by 33.7 per cent to Rs 4,10,379 crore in 2005-06 from a year earlier.

The guidelines include under direct finance to agriculture short, medium and long term loans given for agriculture and allied activities directly to individual farmers, self-help groups (SHGs) or joint liability groups (JLGs) of individual farmers without limit and for others such as corporates, partnership firms and institutions, it specifies for the first time a limit of Rs 20 lakh for taking up agriculture or allied activities.

For loans in excess of Rs 20 lakh in aggregate per borrower, the entire amount outstanding shall be treated as indirect finance for agriculture.

"Banks will find it difficult to meet 18 per cent target for agriculture, with the exclusion of loans in excess of Rs 20 lakh to corporates, partnership firms, from direct finance, since while computing performance under 18 per cent target, as direct finance to agriculture is subject to a sub-target of 13.5 per cent within the 18 per cent target of lending for agriculture," according to a public sector bank official.

The guidelines state that, indirect lending in excess of 4.5 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher, will not be reckoned for computing performance under the 18 per cent sub-target for agriculture.

Also excluded from the proposed guidelines, are banks' lending to bodies such as the REC and SEBs, which were earlier included as part of indirect finance to agriculture.

"While banks will have to restrict loans to sectors other than farm, they will find it difficult to achieve increased targets through small direct borrowings immediately," said a PSB official.

Lending to housing sector was one of the biggest contributors to growth in overall priority sector lending. Housing loans, which grew at 44.8 per cent, together with agriculture, accounted for more than two-third of priority sector lending in 2005-06.

The proposed guidelines set the limit for assistance given to any governmental agency or non-governmental agency (approved by the National Housing Bank for the purpose of refinance) for construction, reconstruction of houses or for slum clearance and rehabilitation of slum dwellers at Rs. 1.25 lakh per housing unit, against the present ceiling of Rs 5 lakh.

"Many banks lend to housing finance agencies to meet targets since direct financing is difficult and these agencies are directly involved. Banks will experience a sudden shortfall in meeting the target because of the new limit of Rs 1.25 lakh on lending indirectly. Under the revised limits, banks will be able to lend only for rural housing through the indirect route," according to a senior public sector bank official.

The draft also defines for the first time, micro credit as including provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards.

Banks' lending to micro financial institutions (MFIs) will not form part of the priority sector advances, as per the definition, bankers said.

"Only direct lending will be included. This is likely to affect private and foreign banks also, which have a higher exposure to lending through MFIs," said a bank official.

A banker said the proposed guidelines will "choke" financing route for non-banking financial companies and other indirect routes of financing. This is in line with the decision to include only those sectors that impact large segments of population and the weaker sections, and which are employment-intensive, as part of the priority sector.

"The Reserve Bank of India wants banks to increase their direct lending under the proposed guidelines. However, many banks will fall short of priority sector lending targets if the proposed guidelines were accepted. While public sector banks may meet the shortfall over a period of time because of wider branch network, private banks and foreign banks would find it more difficult to do so," according to a senior official with a south-based bank.