Priority sector lending certificates were introduced by the Reserve Bank of India in April this year to enable banks which have fallen short of fulfilling their priority sector loan targets can buy the certificates from those banks which have fulfilled their targets. Photo: Aniruddha Chowdhury/Mint
Mumbai: As small finance banks gear up to start operations over the next few months, they are eyeing priority sector lending certificates (PSLC) as a key business opportunity to boost their fee income.
PSLC is a short-term accounting instrument used by banks to cover shortfalls in meeting priority sector lending norms. The buyer pays a fee to the seller for the certificates, which will have a standard lot size of Rs25 lakh and can be purchased in multiples thereof.
According to banking experts, 80-90% of the loan books at small finance banks are made up of priority sector loans. This means these banks will be able to create a buoyant market for PSLCs, which other established banks can buy to achieve their own priority sector lending targets.
Equitas Small Finance Bank, which started banking operations a month back, earned Rs6 crore as fee income by way of selling PSLCs for an undisclosed portfolio.
The fees for PSLCs are decided by the demand-supply gap.
“It will be an important source of consistent quarterly fee income, as 90% of our portfolio is towards priority sector lending,” said H.K.N. Raghavan, chief executive officer of Equitas Small Finance Bank.
Priority sector lending certificates were introduced by the central bank in April this year to enable banks which have fallen short of fulfilling their priority sector loan targets can buy the certificates from those banks which have fulfilled their targets.
The banks can sell these certificates over and above their fulfilled priority sector targets.
In April 2015, the Reserve Bank of India (RBI) changed the review period of priority sector lending for banks from annual to quarterly. Now banks have to meet priority sector lending targets based on the figures of the last quarter instead of the year-end figure. Earlier, most banks used to meet PSL targets at the end of the fourth quarter.
“Tenure will decide the pricing of the certificates as it will be used by banks for bridging the gaps in priority sector targets. From a small finance bank perspective, it is a good fee earning opportunity,” said Rajeev Yadav, chief executive officer of Disha Microfin Pvt. Ltd.
The guidelines for small finance banks states that at least 75% of lending has to be towards priority sector. While 40% of the lending has to be allocated according the norms for commercial banks, the remaining 35% can go towards any priority sector where the small finance bank has competitive advantage.
Domestic commercial banks and foreign banks with more than 20 branches have to lend at least 40% towards priority sectors within which 18% has to be towards agriculture, 7.5% towards micro enterprises, 10% towards weaker sections and remaining 4.5% towards any priority sector.
“Selling PSLCs with microfinance loans as the underlying assets is a narrow, short-term opportunity. Looking ahead, the need is to be able to build a balance sheet with the full range of PSL assets, as per RBI’s norms,” said Alok Prasad, former chief executive officer of Microfinance Institutions Network.