Secondary mart boost

Public sector banks with large presence in the rural and semi-urban areas have seen a secondary market opportunity emerging for priority sector loans.

The trigger would be the Reserve Bank of India's (RBI) proposal to treat investments by banks in securitised loans to agriculture, small enterprises and housing as priority sector exposure and also recognise as ones the priority sector loans purchased outright.

The RBI's proposed regulation that banks' deposits with National Bank for Agriculture and Rural Development (Nabard) and Small Industries Development Bank of India (Sidbi) will not be treated as lending to priority sector is also seen as a factor that will spur a secondary market for such loans, bankers said.

Banks with large presence in the rural and semi-urban areas would be incentivised to lend to various segments of the priority sectors, to which foreign banks and some private sector banks don't have access to, a senior banker said.

Foreign banks and some private sector banks have been meeting their priority sector lending obligation through indirect exposure by way of deposits with Nabard and Sidbi.

With RBI no longer wanting to recognise deposits with Nabard and Sidbi as priority sector exposures, foreign banks would certainly look at public sector banks to originate agriculture and small enterprises loans for ultimately securitising or selling outright.

In its revised draft guidelines on priority sector lending, RBI has said investments in securitised loans to various priority sectors would be recognised only if the loans are originated by banks and financial institutions and fulfil its guidelines on securitisation.

Private and foreign banks as groups have also been helped by the exponential growth in housing loans in achieving the priority sector obligations. Credit to priority sector increased by 33.7 per cent in 2005-06 and by 40.3 per cent in 2004-05.

The agriculture and housing sectors were the major beneficiaries, which together accounted for more than two-thirds of incremental priority sector lending 2005-06.