new priority sector guidelines > 5 points

New Priority Sector Guidelines 5 Points 2015

1 Manoj Rawat | [email protected]

New Priority Sector Guidelines - 5 points which more than meets the eye!

Revamped PSL guidelines aim to create a major shift in Priority sector banking by ensuring

credit access to Small & Marginal Farmers, Smaller Agro-processing units, enabling backward

linkages and promoting renewable energy.

The release of Priority Sector Guidelines was accelerated by Regulator by 2 months and it seems

to aim to create a tactical shift in Priority Sector lending in India with focus on being the rural

and marginalised population.

As Regulator defines it,

Priority sector refers to

those sectors of the

economy which may not

get timely and adequate

credit in the absence of this

special dispensation.

Typically, these are small

value loans to farmers for

agriculture and allied

activities, micro and small

enterprises, poor people for

housing, students for education and other low income groups and weaker sections. These

guidelines enable credit flow to those sections. The spirit of guidelines remains unchanged

however the segments have been broad based.



While the target of 40 % of ANBC as priority sector has been retained with 18% of ANBC to

Agriculture, there are few important shifts and sub classifications which are critical to

understand

1. Credit to Small & Marginal Farmers: While direct and Indirect Agri lending has been

dispensed with but a sub-classification of 8% to Small & Marginal farmers will enable

credit flow to a large number of farmers in the country. Today the country has more

than 84% farmers as Small & Marginal and it is expected that with this change will

enable flow of Rs. 400,000 crore ( approx. USD 70 billion ) to Small & Marginal

Farmers in this year, should banks meet the target. While it seems a challenge for banks

with lesser Rural outreach but it offers an opportunity to give major boost to Rural &

Mass Banking with more innovative approach to increase the outreach and building a

strong technology framework that is focussed on creating mass scale access.

2. Credit to Agro-processing, Warehousing and Agri-infrastructure: This inclusion has

been widely appreciated as broadening the framework but it is important to note that

that the clause of Aggregate sanctioned limit of 100 crore per borrower from the

banking system. This means that the banks will have to focus on smaller companies &

enterprises which working primarily on backward linkages with farmers or are working

in missing link in Food and Agribusiness sector. The banks will now need to get into this

smaller segment with a much more focussed approach and cover many smaller

companies working in Rural India. There are millions of such enterprises & companies

which may offer a very profitable proposition under this segment besides helping

create the missing link Food & Agro Sector.

3. Micro & Small Enterprises Credit: Bank Credit to Micro, Small and Medium

Enterprises, for both manufacturing and service sectors are eligible to be classified under

the priority sector. However the sub classification of 7.5 % fo credit to Micro

Enterprises where the investment in Plant & Machinery in Less than Rs. 25 Lakh ( USD

0.04 Million) or Services industry where investment is less than Rs. 10 lakh ( USD 0.017

Million) will be an area where the banks will have to shift the focus. Considering that

fact that the country has close to 55 million plus such enterprises, there is ample

opportunity however all this will need wider outreach, good risk management

framework and change in banks approach to smaller & marginalised sectors.

4. Advances to weaker section: 10 % of credit flow to weaker section is another area

where banks will have to gear up. However if the banks are able achieve the targets in

Small and Marginal Farmers and under its Financial Inclusion plan, this target should

automatically get achieved.

5. Quarterly monitoring : The priority sector non-achievement will be assessed on

quarterly average basis at the end of the respective year from 2016-17 onwards, instead

of annual basis as at present and this shall keep the banks on toes and more focussed for

Priority Sector lending. It definitely has Net Interest Margin also penal implications,

for non-achievement.



New Inclusions focussed also towards Rural and Smaller Segments:

The inclusion of Renewable energy and Social Infra is another positive point. Its important that

upper limits of Rs. 15 crore per enterprise and Rs. 10 Lakh per household will ensure that it

creates renewable energy infrastructure in Rural areas especially in irrigation management,

drinking water and lighting systems. The upper cap of Rs 5 crore on social infra could help

build, modernise and resurrect infrastructure in smaller areas.

Priority Sector Lending Certificates

Banks will also be allowed to issue PSL certificates to other lenders to make good shortfalls in

meeting PSL targets. This will offer an opportunity to enjoy a premium for the banks which are

Rural focussed and are working in this segment with more than an Obligatory approach.

A pragmatic & progressive move

While the broad basing of the definition of Priority Sector is a progressive and pragmatic move,

its interesting to note that PSL has become far more directed to Small & Marginal farmers and

micro-Enterprises. The banks will need to gear up and revisit the strategy to achieve the targets

especially the sub-classification targets.

This year an amount of approx. Rs. 20,00,000 crore ( USD 315 bn ) is expected to flow under

Priority Sector Lending which could rejuvenate the overall development of Rural Ecosystem.

And add to this the recently announced ambitious schemes by

Government of India and Prime Minister for Financial Inclusion in

India like Pradhan Mantri Jandhan Yojana, National Rural Livelihood

mission, National Urban Livelihood Mission, Pradhan Mantri

Suraksha Bima Yojana, Pradhan Matntri Jeevan Jyoti Bima Yojana and

Atal Pension Yojana.

The Priority Sector Lending not only offers an opportunity to upscale

the banking and financial services in India, but it may well address

the most critical issues of Financial Inclusion, Food Security and

Social Security in India.

For banks the challenges do remain but the willingness to move from an obligatory to

opportunity approach, from Class to Mass banking and from Exclusive to

Inclusive strategy will remain the key.

And banks which may plan it otherwise have a way to offset the PSL targets by trading in

Priority Sector Lending Certificates and support the Banks which are more than willing to

reach the un-accessed.

Manoj Rawat Head, Agribusiness Group RBL Bank, Mumbai [email protected] | TheManojRawat |http://mkrawat.blogspot.in The views expressed in this article are purely personal.

new priority sector guidelines > 5 points

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