Priority Sector Lending

Microfinance India conference

9 October 2007 N.Srinivasan

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

upABC 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 - targetCategory Domestic Banks Foreign Banks

Total P S advances

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

Advances to weaker sections

10 percent of ANBC 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

1969 1991 2001 2005 2006 2007

Agri 162 16750 51922 125250 172292 230180

SSI 257 17181 56002 74588 90239

Others 22 8984 46490 181638 247379

Total 441 42915 154414 381476 509910 632647

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

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

0%

20%

40%

60%

80%

100%

% share to total

1969 1991 2001 2005 2006

Years

Changes in composition of PSL

Agriculture SSI Others

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 (Rs. crore)

Year Deposits Disbursements Allocation1995-96 350.00 387.34 20001996-97 1,042.30 1,087.08 25001997-98 1,007.04 1,009.03 25001998-99 1,337.95 1,313.12 30001999-00 2,306.63 2,277.87 35002000-01 2,653.64 3,176.85 45002001-02 3,590.72 3,790.37 50002002-03 3,857.09 4,103.42 55002003-04 2,158.69 3,922.09 55002004-05 4,353.47 4,316.85 80002005-06 6,092.37 5,953.32 80002006-07 6,966.43 6,222.58 10000Total 35,716.33 37,559.92 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