In a bid to alleviate the pressure on public sector banks (PSBs) to meet higher priority sector lending (PSL) target due to their investments in recapitalisation bonds, the RBI has excluded these bonds for the purpose of arriving at this target.

For each financial year, the PSL target, which includes loans given by banks to agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, and renewable energy is set at 40 per cent of the (adjusted) net bank credit (ANBC) as on March-end of the preceding financial year.

For example, if a bank’s ANBC is ₹1 lakh crore as on March-end 2018, then its PSL target for FY2019 will be ₹40,000 crore. Inclusion of the recapitalisation bonds in ANBC would have increased the base, thereby increasing the PSL target of PSBs.

To ensure continuous flow of credit to the priority sector, the PSL compliance of banks is monitored by the RBI on a quarterly basis.

In January 2018, the government had issued Special Government of India Securities (or recapitalisation bonds) aggregating ₹80,000 crore for subscription by 20 public sector banks (PSBs). The money raised by the government via this route was used to recapitalise these banks.

The government’s gazette notification relating to these bonds (Special Government of India Securities) said they will not be considered as an eligible investment for the purpose of meeting statutory liquidity ratio (SLR), and can be held under the held-to-maturity (HTM) portfolio.

Following this notification, banks requested the RBI that these bonds, which have a maturity of 10-15 years and carry interest rates ranging from 7.35 per cent to 7.68 per cent, should be excluded from the ANBC for the purpose of arriving at the PSL target. The RBI has agreed to their request.

In its updated Master Direction pertaining to PSL, the RBI said investments made by PSBs in recapitalisation bonds floated by the Government of India, will not be taken into account for the purpose of calculation of ANBC.

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