Banking - Recommendation of Committee on Priority Sector Lending norms; sector update ::Edelweiss, pdf link

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The Reserve Bank of India (RBI) released the report of the Committee headed by Mr. M V Nair constituted to re-examine the existing classification and suggest revised guidelines with regard to priority sector lending and related issues. We believe the recommendations are neutral to negative for banks (especially private sector banks) , negative for asset financing companies (like STFL and MMFSL) and neutral for HFCs like HDFC and LICHFL.

Recommendations for banks: Negative for private and foreign banks

Positive:

·         Recommends abolishment of distinction between direct and indirect agriculture and cover the entire spectrum of agriculture and allied activities.

·         Will benefit from deduction of the earlier investments in RIDF from the current shortfall.

·         Interest rates on RIDF will now be linked to reverse repo rate (7.5%) against the bank rate (6%).

·         Eligibility limits have been raised for categories—Education etc. (Refer Table2)

Negative:

·         A focused sub-target of 9% of ANBC is fixed for loans extended by banks to small and marginal farmers, to be achieved in stages latest by 2015-16—Private banks on aggregate short by 6.2%. Also, unless backed by adequate credit guarantee scheme NPLs in the space can further rise.

·         Similarly, a focused sub-target of 7% of ANBC is fixed for loans extended by banks to micro enterprises, to be achieved in stages latest by 2013-14. Private banks on aggregate short by 2.3%.

·         Foreign banks' PSL limits hiked to 40% from current 32%. Also, making it stricter to meet the export credit sub-limit of 15% (12% earlier) as capping export credit upto a limit of INR100mn will only qualify for reckoning under priority sector.

Important recommendations for NBFCs including HFCs: Negative for AFCs, neutral for HFCs

Positive:

Bank loans to NBFCs for on-lending including buy-outs and securitization to specified segments may be reckoned for classification under priority sector (PSL), up to a maximum of 5% of ANBC. On the face, the move is positive for AFC, HFC as the on-lending will now be classified as PSL.

Banking - Recommendation of Committee on Priority Sector Lending norms; sector update