New priority lending norms will hit pvt, foreign banks most

Times are going to be challenging for foreign and private banks on the priority sector lending front, following the recent recommendations of an RBI-appointed committee to review such lending norms.

The MV Nair committee recommendations on priority sector lending, constituted by the Reserve Bank of India (RBI) in August 2011, adopted a wide and exhaustive consultation process, and identified key issues facing diverse segments and sections of society; examined them thoroughly and made recommendations that would support achieving the objectives of directed lending.

While unveiling the committee’s report in February this year, the RBI had said, “The recommendations of the committee are expected to have significant impact in addressing the issue of directing lending to those who have lack of access to credit and to those sectors which generate large employment. It is hoped that these recommendations would promote the country’s developmental and inclusive goals.”[caption id=“attachment_325160” align=“alignleft” width=“380” caption=“The logo of Reserve Bank of India. Reuters”]  [/caption]

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With limited branch network, foreign banks would be hit hard by the new norms which mandate an increase in the priority sector lending target for foreign banks at 40 percent of adjusted net bank credit, the same level applicable for domestic commercial banks. This is a significant increase from the 32 percent earlier.

The increase is important since it puts foreign banks, which have strong balance-sheets, on a par with domestic banks as far as priority lending is concerned. But how far the foreign banks will be able to achieve this new target now remains to be seen.

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A recent note put out by broking house Motilal Oswal on the changes in banking norms says the new RBI norms, while aiming at better financial inclusion, will lead to a rise in operating expenses. “Balancing of risk and growth will be a key,” the note says.

The Nair committee, significantly, has also proposed new sub-segments-for small and marginal farmers and weaker sections-within the overall norms. In case of small and marginal farmers, banks will need to achieve a target of 9 percent of adjusted net bank credit by FY16 (2015-16). Banks - both state-run and foreign - are currently way behind in these targets and hence will need to step up their lending to these sectors. “Banks would have to balance the risk of asset quality while aiming to achieve the target, which would be a challenge,” the Motilal Oswal note says.

However, one of the major pluses of these recommendations is the doing away of the distinction between direct and indirect lending to agriculture. The sector ‘agriculture and allied activities’ will be a composite sector within the priority sector - there is not distinction between direct and indirect agriculture. The targets for agriculture and allied activities will be 18 percent of ANBC (adjusted net bank credit) or CEOBE (credit equivalent of off-balance sheet exposure), whichever is higher, according to the committee.

Said RBI, “The MSE (medium and small enterprises) sector may continue to be under priority sector. Within the MSE sector, a sub-target for micro enterprises is recommended equivalent to 7 percent of ANBC or CEOBE, whichever is higher, to be achieved in stages by 2013-14.”

While increasing the foreign banks’ priority sector target to 40 percent, the committee has also set sub-targets of 15 percent for exports and 15 percent for MSE sector, within which 7 percent is to be earmarked for micro enterprises.

Banks may be encouraged to ensure that the number of outstanding beneficiary accounts under ‘small and marginal farmers’ and micro enterprises’ each register a minimum annual growth rate of 15 percent, the committee says.

These new sub-targets, experts believe, will be a big challenge for private and foreign banks, since the lending levels for these banks are well below these new targets.

The RBI’s view seems to be that it is now time foreign and private banks, having done business in India for long, join as equal stakeholders in the objective of greater financial inclusion. The aim is to increase direct lending to those who have a lack of access to credit and those sectors which generate large employment. How the foreign and private banks respond to these targets remains to be seen.