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Management of Banks Section A
Priority Sector Lending Norms in
IndiaNationalized and Foreign Ba
Perspective
Abhishek Amber Amrita Anshul Apurba Arnab Devina Ra
PGP/15/65 PGP/15/68 PGP/15/69 PGP/15/71 PGP/15/73 PGP/15/74 PGP/15/82 PG
Presented by Group 4
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Descriptionof Priority
sectorsformalised
Banks toraise shareof PSL to33.33% by79
Further raisePSL to 40% by1985 Subtargets foragriculture andweak sectionsspecified
1971
1974
1980
Foreign banks > 20 branches :PSL -40 % of total adva
Education and home loans up to the specified limits, a
individuals for up to Rs 50,000 to clear debts of money le
be priority lending
Advances up to Rs 25 lakh in cities with population> 1Rs 15 lakh in other towns, will be priority lending
Parameters Domestic commercial banks
Total Priority Sector Advances 40%ANBC orCEA, whichever is higher.Sam
ban
Total agricultural advances
18 % of ANBC or CEA, whichever is higher .Indirect
lending >4.5% of ANBC is not considered under 18%
target,but agri advances-direct/indirect is computed
under 18%
No t
SSI advances Reckoned in overall PSL target of 40% 10%
Micro enterprises within SSI
40% of SSI advances tounits with investments in plant
up to Rs 5 lakh
20 per cent of total SSI advances should go to units
with investment in plant & machinery between Rs 5 lakh
and Rs. 25 lakh
(So,60%of SSI to the micro enterprises)
Sam
ban
Export credit Not a part of PSL for domestic commercial banks12%
CEA
Advances to weaker sections 10% of ANBC or CEA,whichever is higher No
Differential rate of interest
scheme
1% of advances outstanding of previous year. No less
than 40 % of advances granted under DRI scheme go to
SC/STs.
At least2/3rd of DRI advances should be granted
through rural and semi-urban branches.
No t
RBI ,July 20-2012
Categories of priority sector
Agriculture (Direct and indirect finance)
Small Scale Industries(direct & Indirect /finance)
Small Business/service enterprises
Micro Credit
Education loans
Housing loans
Investments in securitised assets representation loans to
agriculture and SSI
Priority Sector Lending :
Important role given by the Reserve Bank of India (RBI) to
banks for providing a specified portion of the bank lending to
few specific sectors like agriculture or small scale industries
Meant for all round development of the economy apart from
only focusing on the financial sector
Targets & Sub-targets
Introduction
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Categories
Domestic commercial banks
/ Foreign banks with 20 and
above branches
Foreign banks w
20 bran
Total Priority Sector 40 percent of Adjusted Net
Bank Credit (ANBC)
32 percent
Total agriculture 18 percent of ANBC or credit
equivalent amount
No specific targ
of total priority
Micro & Small
Enterprises (MSE)
Computed under the overall
priority sector target of 40
percent of ANBC or credit
equivalent amount
No specific targ
of total priority
Export Credit Not a separate category, to be
included under MSE and
agriculture
No specific targ
of total priority
Advances to Weaker Sections 10 percent of ANBC or credit
equivalent amount
No specific targ
priority sec
Before 20th July, 2012
After 20th July, 2012
Foreign banks having 20 or more branches in the country will be brought on par with domes
for priority sector targets in a phased manner over a maximum period of 5 years starting April 1,
The focus of the revised guidelines is on direct lending by banks and not through intermed
Non Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs).
The overall target under
priority sector is retained
at 40 percent
RBI Norms for Priority sector Lending (PSL)
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Foreign banks >20 branches:
Standard Chartered Bank94 branches
Hong Kong & Shanghai Banking
Corporation:
50 branches
Citibank42 branches
Royal Bank of Scotland31 branches
Problems in PSL: Do not have enough branches and manpower
Fear that loans may turn NPLS
Pathway for the banks:
Split their wholesale
and consumer
banking operations
and opt for a NBFC
structure
They will lose a
cheap source of
money i.e.
current and
savings deposits
Citis efforts to lend through Citicorp wasnt
exactly a success
The focus of the revised guidelines, b
recommendations of the M V Nair-led panel, is also
lending by banks and not through intermediaries
Banking Financial Companies (NBFCs) and HousinCompanies (HFCs), the RBI said. Foreign banks op
India as a locally-incorporated wholly-owned subsid
of a parent bank would be required to meet th
sector lending requirements on par with domestic b
RBI guidelines:
Priority Sector Lending: Foreign Banks Perspective
/
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PSL in Perspective of Nationalized Banks (1/4)
The share of priority sector NPAs in gross NPA
banks witnessed an increase in 2010-11. While
priority sector gross NPAs to priority sector advan
in public sector banks in 2010-11, it declined in
banks during the same period.
Credit to Priority Sectors
The priority sector lending witnessed a growt
2010-11. However, the growth of agricultu
decelerated to 9 % in 2010-11 as compared with 23% in the previous year. In 2010-11 also, at t
level, banks have lent more than 40 % of their AN
sectors. The sub-target prescribed for agricultu
ANBC was also achieved by banks in 2010-11.
i i f i li d k ( / )
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The limit for housing loans considered as a priority sector was increased from 20 lakh to
25 lakh for housing loans sanctioned by UCBs on or after April 1, 2011.
Loans (up to 50,000) to SHGs/ JLGs for agricultural and allied activities would be
considered as priority sector advances.
7 out of 26 public sector banks were not able to meet the priority sector lending target of
40 % of ANBC in 2010-11. Further, it is a concern that 18 out of 26 PSBs could not meet the
target set for agricultural advances in 2010-11. Among the private sector banks, only 1 bank
could not meet the priority sector lending target in 2010- 11. 10 private sector banks did
not meet the target set for agricultural advances in 2010-11.
It is important to note that more
the total credit of RRBs belonged
sector in 2010-11. Half of wh
agricultural sector
Share of agricultural credit in
witnessed a marginal decline in 20
agriculture, crop loans constituted
of the volume of lending.
Need for banks to conform to the p
sector lending target Non adheagricultural lending target by a la
banks raises concern as still a large
Indias population depends on th
sector for livelihood.
PSL in Perspective of Nationalized Banks (2/4)
PSL i P i f N i li d B k (3/4)
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PSL in Perspective of Nationalized Banks (3/4)
PSL i P ti f N ti li d B k (4/4)
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The share of agriculture under priority sector in total advances declined in 2011 as compared to the previous year UCBs advan
sectors constituted almost 46 % of total advances Need for further improving the efficiency parameters of the Indian Banks.
The NIM of the Indian banking system is higher than that in some of the other emerging market economies even after accountin
mandated social sector obligations such as priority sector lending and credit support for the Governments anti-poverty initiatives
In sum, the priority sector NPAs to priority sector advances was generally high in PSBs as compared with private sector banks.
PSL in Perspective of Nationalized Banks (4/4)
I I PSL
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The direct impact will be an increase in private bankspriority sector sub segment shortfall vs. targets. Theseshortfalls have to be parked in low-yielding instruments.
The continuous change in RBI norms can impact margins
The percentage of bad loans in the priority sector hasbeen on an all time high
Rising Bad Loans
Actual margin impact may also vary based on RIDFsabsorptive capacity
Over the longer term, private banks will have to ramp-uptheir operations in the rural/semi-urban areas to ensurethat the priority sector obligations are met.
Longer-term implications are possible for operating &credit costs
For many large listed NBFCs, banks are a key fundingsource. These changes may have negative implicationsfor cost and amount of funding that NBFCs receive.
Collateral impact higher cost funding for NBFC
Priority sector lending is necessary to force banks to focus on rural areas but urban areas too have a priority sector problem. Th
urban areas are equally excluded and now that the migration is happening from rural to urban areas, it is going to become an
problem
Some Other Issues:
1. Bias against landless labourers: borrowing to b
for ones land is recognised under priority sector
agriculture loan while borrowing to purchase foo
consumption by a landless agricultural labourer
2. Income-based targeting for non-bank intermed
3. Discontinuous measurement of priority sector a
Issues In PSL
PSL and Inclusive Growth
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3 pillars of inclusivegrowth
MaximizeEconomic
opportunities
Ensureeconomic well
being
Ensure equalopportunitiesto economic
opportunities
1% increase in Agricultural output results in 2.5 times increase in income of lowest 3 deciles
Significant correlation found between agri output and Bank credit (except in Kerala, Haryana, J&K,Karnataka)
In the budget of 2012-13, target of agricultural credit was raised by INR 100000 cr to 575000 cr
0
2000
4000
6000
8000
10000
12000
14000
1 3 5 7 9 11 13 15 17 19 21 23 25
Per ca
credit
Per ca
Pondicherry (1973-74 to 1996-97)
PerPer c
PSL and Inclusive Growth
Priority Sector Lending: Impact on Profitability?
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SubsidizedInterest Rates
Forcefullending to
Priority Sector
Increase inminimum capfor PSL over
the years
High servicingcosts of large
number ofsmall accounts
Year Agriculture SSI Export Transport Retail Int. Inco
Total
1980 3.15 1.7 4.67 3.46 0.45 0
1990 2.64 0.53 3.94 1.55 -0.45 0
2000 1.39 0.02 0 0.31 0.31 0
Interest Rate Subsidy on Priority Sector (in
41.90%
20.40%
20.20%
17.50%
% of NPA
Non
Secto
Agric
SME
Average lending rate is below commercial lending ratebut higher than Prime Lending Rate/Base Rate
Post reform, the loss due to PSL is attributed to
increase in volumes rather than subsidy
Impact on Profitability due to
Priority Sector Lending: Impact on Profitability?
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Thank You