Ind-Ra expects PSLCs to be priced between 1%-3% annually of the amount of the certificates issued, depending on the PSL sub-segment deficit of the buyer and overall demand and supply and historic pricing of traditional instruments used to achieve PSL targets namely securitisation, inter-bank participation certificates and business correspondent arrangements.
The certificates incentivise banks with better origination and risk assessment skills in priority sector categories to sell their excess PSL loans through the market to the banks with limited priority sector loan origination and servicing expertise to meet their PSL targets. Ind-Ra estimates that SFBs may sell PSLCs worth INR90bn-INR190bn (11%-23% of estimated FYE20 assets under management) and off-balance sheet transactions of INR60bn-INR400bn (7%-48% of estimated FYE20 assets under management) by FY20 depending on their deposit mobilisation and assuming they maintain current levels of PSL qualifying loans. Urban co-operative banks can also be important PSLC suppliers of up to INR300bn in Ind-Ra's assessment given the PSL norms for urban co-operative banks and that there is no transfer of credit risk to PSLC buyers. However, a significant mark-up over the operating and credit costs associated with direct origination by the seller bank could act as a dampener to the introduction of PSLCs.
SFBs are required to maintain 75% of adjusted net bank credit as their PSL target; the sample of portfolios with Ind-Ra in FY15 indicates that over 90% of the portfolio of most SFBs qualifies under PSL and 34% qualifies as agriculture and small and marginal farmer categories. However, SFBs are also likely to grow their assets under management by about 25% CAGR by FY19-FY20 and based on funding available and deposit mobilisation capability, they will also be important participants in off-balance sheet transactions on PSL, which could limit their participation in PSLC.
Ind-Ra believes most SCBs will be buyers in the PSLC market; as the PSL targets for foreign banks increase by FY20, they will also participate. Some SCBs (Punjab National Bank, City Union Bank) could also be potential suppliers due to their excess PSL on an overall basis and in certain sub-segments, but PSL achievement calculations fluctuations make it difficult to project.
Although some SCBs usually achieve their overall PSL targets, they fall short in agriculture and other sub-segments. Ind-Ra estimates the total direct origination PSL shortfall (including sub-segments) to increase to a minimum of INR3.1trn (3.1% of projected adjusted net bank credit) in FY20 from a minimum of INR1.9trn (around 3%) in FY15. To cover the banking system direct origination PSL shortfall (including sub-segments), the agency expects the share of Rural Infrastructure Development Fund (RIDF) and other such qualifying funds to decline to 53% in FY20 (but still remains important at INR1.5trn-INR1.6trn; also subject to RIDF being called for) from 68% in FY15, the share of PSLCs to constitute 15% while that of securitisation / inter-bank participation certificates and business correspondent arrangements to remain steady at 32%.
Ind-Ra believes that the wide acceptance and demand of PSLCs will lead to the creation of specialised players in the priority sector. The certificates have the potential to develop an active market and allow for the formation of pricing benchmarks for the existing instruments used to meet the priority sector shortfall.
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