Priority Sector Lending Ns

Priority Sector Lending Microfinance India conference 9 October 2007 N.Srinivasan

Hands up

Don’t be hasty; You can take a loan that Is just like loot. Nobody repays

ABC Bank Branch manager

The logic of PSL • Constraints in credit flow to sectors which support a large number of livelihoods • Preference for industry, commerce, trade and security based financing • Banks must support vulnerable and unglamorous sectors also • Banking as a public utility? • Credit as a universal service obligation?

History so far • • • •

Introduced in 1969 Quantitative targets brought in 1974 Stipulation of 40% target in 1985 Narasimham committee I on financial sector reforms did not favour continuation • Narasimham committee II on financial sector reforms favoured continuation • Recent review by RBI internal Working Group in 2005 supported continuation

Changes in the environment • Agriculture less significant in contribution to national income • Rapidly expanding service sector • Financial sector reforms – emphasis on profitability of banks • Greater private ownership of banks • Large expectations from banks – by people and govts

Norms - target Category

Domestic Banks

Foreign Banks

40 percent of ANBC*

32 percent of ANBC

Agri credit

18% of ANBC

No target

SSI

No specific target

10 percent of ANBC

Export credit

Not part of PS

12 percent of ANBC

Total P S advances

Advances to 10 percent of ANBC weaker sections

No target

The norms – sectors and type of loans • • • • • • • • • • • • • •

1. Agriculture 2. Small scale industries 3. Small road and water transport operators 4. Small business 5. Retail trade 6. Professional and self-employed persons 7. State sponsored organisations for SC/ST 8. Education loans 9. Housing. 10. Consumption loans for weaker sections 11. Loans to SHGs and NGOs for onlending to SHGs 12. Loans to the software industry 13. Loans to food and agro-processing sector 14. Investment by banks in venture capital

Priority sector loans by commercial banks – outstanding (Rs crore) 1969

1991

2001

2005

2006

2007

Agri

162 16750

51922 125250 172292 230180

SSI

257 17181

56002

Others Total

22

8984

74588

90239

46490 181638 247379

441 42915 154414 381476 509910 632647

Present status Share (%) of different sectors in credit

1969 1991 2001 2005 2006 Agriculture

36.73 39.03 33.63 32.83 33.79

SSI

58.28 40.03 36.27 19.55 17.70

Others

4.99 20.93 30.11 47.61 48.51

Total

100

100

100

100

100

Changes in norms and their impact • Inclusion of more sectors – banks enlarge OPS portfolio 4% in 1969 – 48% in 2006 • Raising of ceiling limits of loans and units – preference for larger loans (small loan accounts decline by 26 lakh between 1992 and 2004) • Interest rate ceilings on small loans –focus shifts to on large loans (average loan size Rs 1.17 lakhs)

Quality of compliance Changes in composition of PSL 100% 80% % share to total

60% 40% 20% 0%

1969

1991

2001 Years

Agriculture

SSI Others

2005

2006

Quality of compliance • Targets achieved at bank level • Some states and regions underfinanced • Agriculture sub-targets ensure sustained share in flow – SSI sector suffers • Indirect finance and investment in bonds of SIDBI and RIDF of NABARD preferred • Small loans - not a priority • Monitoring requires improvement to ensure quality of compliance

Problems of banks • • • •

Stringent prudential standards Interest rate and pricing Collateral requirements Borrower selection – govt sponsored programmes • Network and staffing constraints

Priority sector and inclusion • PS can facilitate achievement of inclusion agenda • Focus to shift from underserved sectors to underserved people • States/regions with lower intensity of coverage to be prioritised • Microfinance would be a critical tool in inclusion

Microfinance –an alternative to PSL? • 29 lakh SHGs covered • Credit flow of Rs 6640 crore last fiscal • Network constraints of banks make microfinance an ideal option for PSL • Facilitator model could provides the means • But microfinance is not a substitute to PSL • Loan volumes about 1% of PSL portfolio

Rural Infrastructure Development Fund • Mechanism of investing shortfalls in PSL • Remunerative in the beginning • Penal element – low interest rates- introduced subsequently • Allocations for deposits not met – gap of Rs 25000 crore • By 2007, allocations for 2003-04 were met • No remedial action taken • New Deposits not reckoned as PSL from April 2007

Deposits and Disbursements under RIDF Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Total

Deposits Disbursements 350.00 387.34 1,042.30 1,087.08 1,007.04 1,009.03 1,337.95 1,313.12 2,306.63 2,277.87 2,653.64 3,176.85 3,590.72 3,790.37 3,857.09 4,103.42 2,158.69 3,922.09 4,353.47 4,316.85 6,092.37 5,953.32 6,966.43 6,222.58 35,716.33 37,559.92

(Rs. crore)

Allocation 2000 2500 2500 3000 3500 4500 5000 5500 5500 8000 8000 10000 60000

Recent changes • Adjusted net bank credit (net bank credit + govt security investment held to maturity) as of previous year end as the basis • Investment in securitised assets with underlying PSL loans reckoned • PSL portfolio purchase reckoned • Participation certificates (risk sharing) with underlying PSL reckoned • Loans to NGOs/MFIs for on-lending reckoned • Fresh deposits with NABARD/SIDBI not reckoned

The road ahead • Reasons exist for continuation • Recent changes likely to improve credit-flow and quality of compliance • Restrictions on banks’ autonomy should be withdrawn • Facilitators to play a key role • Banks with network and staff would be able to sell portfolios, securitised assets and IBPCs • Cooperative banks and RRBs could benefit through portfolio sales • MFIs likely to benefit with more bank credit • Microfinance will get a boost

Conclusion • Time for review of targets of each sector • People and regional focus needed • Inclusion objective to be integrated with PSL • Tighter monitoring and effective enforcement • Need for a sunset clause – with achievement of full financial inclusion?

Thank you for the patience