New Priority Sector Guidelines – 5 points that more than meet the eye !

Sustainable Agriculture, MSME & Green Value Chain Finance | Priority Sector Finance | Manoj Rawat, ValueFin India

New Priority Sector Guidelines – 5 points that more than meet the eye !

New Priority Sector Guidelines – 5 points that more than meet the eye !

 

Revamped PSL guidelines aim to create a major shift in Priority sector banking by ensure 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 marginalized 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.
  1. 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 bank’s 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.

  1. 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 focused also towards Rural and Smaller Segments:

The inclusion of Renewable energy and Social Infra is another positive point. It’s 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, modernize 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 focused 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, it’s 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 | India

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The views expressed are purely personal.
 
 

 

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