Banks to benefit from RBI's PSLC guidelines: Moody's

Banks with significant gaps in meeting priority sector loan requirement will benefit from Reserve Bank's guidelines for priority sector lending certificates, Moody's said on April 11. RBI last week released guidelines for priority sector lending certificates (PSLC), whereby banks can buy and sell such credits to manage their priority sector lending requirements.

"This is credit positive for banks without expertise in making priority sector loans because it allows them to focus on their strengths and purchase credits from banks with expertise in making such loans, instead of diverting their own resources towards meeting priority sector lending targets," a Moody's Credit Outlook report said.

The move would benefit banks with significant gaps in meeting their priority sector loan requirements, including Bank of India, Bank of Baroda and IDBI Bank, it said, adding lending exposures will likely be streamlined to core segments, improving operating efficiencies.

"We expect banks with priority sector lending surpluses will have additional contributions to their non-interest income via the sale of certificates, improving their profitability," it said.

At present, banks have to lend 40 per cent of their total loans to priority sectors of agriculture, micro credits, education and social housing to promote financial inclusion particularly in rural areas. This, Moody's said, meant that all banks had to have a priority sector focus, regardless of whether it fits their overall competitive strengths.

"Banks that did not meet this threshold were required to place deposits with the Rural Infrastructure Development Fund, which has comparatively lower yields and thus serves as a key disincentive for banks to fall below their priority sector lending targets," it said.

Also, there is no transfer of assets associated with the sale of the certificates. "Thus, the underlying credit risk and the funding requirements continue to be retained by the originating entity," it said.

This, it said, should make transactions in priority sector lending certificates very straightforward because there would be little due diligence required. This contrasts with the current practice, in which banks must buy out priority sector loan assets from other entities in order for them to be counted as part of their priority sector lending obligations.

"Although the fee to be paid for the certificates will be market determined, we expect that it will be lower than the cost that banks are paying currently for non-compliance with the priority sector loan norms," it added.