Leading banks stock up on priority sector lending certificates to meet targets

In a bid to meet the priority sector lending targets, many leading banks appear to have purchased priority sector lending certificates (PSLCs) in FY20. The PSLC platform — introduced in April 2016 — provides banks an easier way to make good their shortfall, without having to take on loans in their books. The buyer bank only pays a fee to the seller of the PSLC which is market determined.

Based on data compiled from banks’ annual reports, SBI bought ₹87,329 crore worth of PSLCs during FY20, against ₹51,606 crore in FY19. The leading lender did not sell any PSLCs during FY20. HDFC Bank bought about ₹64,500 crore and Axis Bank purchased PSLCs worth about ₹48,320 crore during the last fiscal. ICICI Bank bought about ₹38,198 crore of PSLCs, while Kotak Bank purchased about ₹15,676 crore in FY20. Many of these banks have also sold PSLCs in certain segments during FY20.

Banks are required to lend a minimum of 40 per cent of their total loans (adjusted net bank credit or ANBC) to the priority sector (agriculture, micro enterprises, education, social housing, etc.). They are also required to meet sub-targets such as 18 per cent for agriculture (8 per cent for small and marginal farmers), 7.5 per cent for micro enterprises and 10 per cent for weaker sections. The RBI has also directed banks to maintain lending to non-corporate farmers at the banking system’s average level for the last three years, failing which banks will attract penalties. RBI notified a target level of 12.11 per cent of ANBC for this purpose for fiscal 2020.

While banks manage to meet their overall PSL requirement, they often fall short of targets in specific sub-segments. Buying PSLCs in a particular sub-segment helps banks meet their PSL requirement without having to take on the risk or loan assets on their books. Similarly, banks can sell their excess in achievement over targets and earn a fee.

Earlier, banks had to either buy out low-yielding priority sector loans from other banks or deposit the shortfall in Rural Infrastructure Development Fund (RIDF) and other funds with NABARD/ NHB/ SIDBI/ MUDRA as decided by the RBI from time to time. These deposits have a maturity of up to seven years and carry interest rates lower than market rates.

Trading competencies

Banks can trade PSLCs in specific categories, based on their requirement and competencies. For instance, SBI made significant purchase of micro enterprise PSLCs in FY20 to the tune of ₹47,525 crore. HDFC Bank on the other hand bought about ₹42,000 crore of small and marginal farmers’ PSLCs. While SBI did not sell any PSLCs during the year, HDFC Bank sold about ₹13,750 crore of PSLCs in the general category.

While ICICI Bank purchased agriculture PSCLs, it sold micro enterprises and general category PSLCs during the year. However, the bank still fell short of RBI’s mandated requirement in certain sub-segments. According to the annual report, while ICICI Bank met the overall 40 per cent PSL target, its lending to the agriculture sector constituted 15.6 per cent (against the mandated 18 per cent), 8.3 per cent to weaker sections (against 10 per cent) and 6 per cent small and marginal farmers (vis-à-vis 8 per cent).

According to RBI’s report on trends and progress of banking, in 2018-19, while banks managed to achieve the overall PSL target, there were shortfalls in certain sub-targets: PSBs in micro enterprises and private banks in small and marginal farmers. This was despite trading volume of the PSLCs jumping 78 per cent to ₹3,27,429 crore as on March 31, 2019.

Going by the individual banks’ data put out in the annual report, it appears that trading activity in PSLCs has gone up further in FY20. With overall credit growth in the sector slowing considerably in FY20, priority sector lending too has taken a hit. Growth in overall priority sector loans stood at 5.8 per cent in FY20, with a sharp slowdown in housing (4 per cent) and agriculture (3.8 per cent).

Fee payment

In a PSLC transaction, the buyer bank pays a fee to the seller which is market determined. The price depends on a host of factors such as the category of loans and demand and supply scenario. Fees paid (recorded as other expenditure)/received (reported as miscellaneous income) for PSLCs is amortised on straight-line basis over the period of the certificate by banks.

Axis Bank, for instance, purchased PSLCs at a cost of ₹611 crore during FY20.