Issue of PSLCs is good for banks: Moody's
The release of Reserve Bank’s guidelines for priority sector lending certificates (PSLCs) is credit positive for banks that are not having expertise in making priority sector loans, said global rating agency Moody’s. “This allows them to focus on their strengths and purchase credits from banks with expertise in making such loans, instead of diverting their own resources toward meeting priority sector lending targets,” it said.
While releasing the instructions on trading in PSLCs, S S Mundra, Deputy Governor of RBI also launched a platform to enable trading in the certificates through its Core Banking Solution portal (e-Kuber). All Scheduled Commercial Banks including Regional Rural Banks, Urban Co-operative Banks, Small Finance Banks and Local Area Banks are eligible to participate in the trading, the RBI informed.
The RBI had revised the priority sector guidelines in April 2015 which provided for the introduction of PSLCs as a mechanism to incentivise banks having surplus in their lending to different categories of priority sector. The PSLCs will have a standard lot size of Rs. 25 lakh and multiples thereof. There will be no transfer of credit risk on the underlying and the settlement of funds will be done through the e-Kuber portal.
“Indian banks need to have 40 per cent of their total loan exposures in priority sector lending, whose sectors include agriculture, micro credits, education and social housing, and promote financial inclusion, particularly in rural areas. Banks that did not meet these requirements have to place deposits with the Rural Infrastructure Development Fund, which has comparatively lower yields and serves as a key disincentive for banks to fall below their priority sector lending targets,” Moody’s said in a statement.
It further said, “With the introduction of priority sector lending certificates, banks without the ability to generate priority sector loans will no longer need to drive lending in this segment organically. Instead, they can rely on the PSLCs to fulfil the requirement, and focus on other segments of lending that play to their strengths. A bank that does not have the capability to originate agriculture loans can now buy PSLCs from banks that are well entrenched in the segment. These norms encourage specialisation within the banking sector, which is credit positive.”
“There is no transfer of assets associated with the sale of the certificates. The underlying credit risk and the funding requirements continue to be retained by the originating entity. Although the fee to be paid for the PSLCs 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. We expect this development to benefit banks with significant gaps in meeting their priority sector loan requirements,” it added.
to success.