IBC resolutions and haircuts

 

RBI SHOULD WITHDRAW THE DISINCENTIVE FRAMEWORK IN PSL

Reserve Bank of India has recently reviewed its priority sector lending (PSL) guidelines. In addition to traditional priority sectors like agriculture, MSME, education, housing, etc. Social Infrastructure, Renewable Energy, export credit to non-priority sector up to a certain per cent and Co-origination of lending by Banks and NBFCs have been brought under eligible categories for PSL classification. As hitherto securitisation/assignment of assets, which were originated under eligible category for PSL, investments made in RIDF and other eligible funds with NABARD, NHB, SIDBI in lieu of non-achievement of PSL and outstanding PSLCs (Prioirty Sector Lending Certificates) will be included for PSL calculations. Overall PSL achievement of 40% of ANBC/CEOBE by domestic/foreign banks and 75% of ANBC/CEOBE by RRBs/SFBs, with sub-ceiling for each category is retained.

For the first time, in calculation of PSL targets, incentive and dis-incentive framework have been designed to rank the districts on the basis of per capital credit flow to priority sector. Under the incentive framework, higher weight (125%) would be assigned to the incremental credit flow in districts where the per capita PSL is less than Rs.6,000. And under the dis-incentive frame work, lower weight (90%) would be assigned for incremental credit flow in districts where the per capita PSL is in excess of Rs.25,000. 100% weight, as usual, will be given for those districts where the per capita PSL ranges from Rs.6,000 to Rs.25,000. The districts have been grouped under three categories – incentive, normal, dis-incentive - based on the PSL data on date. This will be applicable from FY 2021-22 to 2023-24, after which the list will be reviewed.  RBI has cited this as a solution to address the regional disparities in the flow of priority sector credit at the district level.

De-growth to achieve parity: While the objective to remove regional disparities among districts is laudable and the incentive framework for districts with less credit flow to PSL should be welcomed, the dis-incentive framework for districts with higher per capita flow to PSL is not desirable. Dis-incentives is understandable if the lending is extended to high risk category assets like unsecured loans or if the lending is to sectors which do not come under PSL definition. Here it is introduced for lending to categories which are identified as priority. Reckoning the incremental credit flow at 90% of actuals for PSL calculations, in districts identified with higher per capita credit flow to PSL, will push the banks, including SFBs, to keep away from the growth of the identified districts in the long run.

Rationale Missing: Fixing the per capita credit flow greater than Rs.25,000 as high PSL and bring a district under dis-incentive framework defies logic, if one considers the maximum loan amount  to the following eligible categories.

1.    Housing Loans upto Rs.35 lacs/Rs.25 lacs in metro/other centres

2.    Education Loans upto Rs.20 lacs

3.    Loans upto Rs.1 lac/Rs.2 lac to individual borrower/SHG

4.    MUDRA loans upto Rs.10 lacs

5.    Loans for pledge against agricultural produce upto Rs.50 lacs

6.    Loans upto Rs.2 cr./ Rs.5 cr. to corporate farmers subject to conditions

In addition, loans for start-ups in MSME upto Rs.50 cr., agricultural infrastructure upto aggregate limit of Rs.100 cr per borrower, social infrastructure development loans upto Rs.5 cr qualify for PSL classification. Any loan given in the above categories will push the per capita credit flow in the districts substantially, but it does not imply that the population as a whole have got its due benefits under PSL. The above list is shown only to indicate that the per capita credit flow of Rs.25,000 fixed as high PSL district is actually too low. If the dis-incentive framework is to be retained, the per capita credit flow for high PSL should be fixed at a minimum of Rs.50,000. In fact, the per capita credit flow for identifying low PSL districts should be increased (from less than Rs.6,000) to at least to less than Rs.10,000

Likely impact of the dis-incentive framework:

1.    Out of 733 districts in India, 205 districts are identified under dis-incentive framework and 184 under incentive framework. On perusing the list, barring Asifabad district in Telengana, no other district in South India figures in the incentive framework. In fact, nearly 100% of the districts in Kerala, Tamil Nadu, Andhra Pradesh, Telengana and major districts of Karnataka are in the dis-incentive framework. Growth of PSL Credit in South India is likely to be on a lower scale and this will affect the Indian Economy as a whole. (Except Kerala (65%) and Karnataka (75%), the CD ratios of the other states in South India are more than 100%)

 2.    While RRBs are exempted from the above framework for PSL calculations, SFBs are not excluded.  But the SFBs are required to achieve 75% of their ANBC/CEOBE under PSL. Majority of the SFBs have predominant presence in the Southern States. They may have to purchase PSLCs from RRBs/other banks or invest in RIDF/other eligible funds to achieve their targets.

3.    Social Infrastructure, Agricultural Infrastructure, Renewable Energy, Start-ups in MSMEs, co-origination in lending to priority sector by banks and NBFCs are new concepts to develop the region as a whole. Financing development activities like land/soil development, irrigation, power, warehouses, etc. are the focus areas now and banks are encouraged to move away from the traditional crop loan financing in agriculture. Dis-incentive framework in the identified districts might result in viable projects in the above categories, not getting their due share of loans in time in the said districts.

4.    SHGs and MSMEs are the main stay in some of the districts, now brought under dis-incentive frame work. The number of PMJDY accounts is also quite high in these districts. As the loans extended will get only 90% weightage for calculation purposes, the banks might slow down the credit flow to these segments in the said districts.

5.    There will be a set of select banks which have contributed to the growth of PSL on a very high scale in the districts identified for dis-incentive framework. It is possible that they might not be able to open branches in the other districts for viability, control and administrative reasons. Though they have contributed their might for national building, they will find themselves at a disadvantageous position now. 

On the whole, the dis-incentive framework will impact the credit growth to the traditional priority sectors as well as in financing new start-ups, agricultural/social infrastructure in the 205 districts identified as having high PSL.

RBI should review the guidelines and withdraw the dis-incentive frame work, while retaining the incentive framework to bring parity in the flow of credit to PSL at district level.  It should also increase the per capita credit flow to PSL (from less than Rs.6000) to less than Rs.10,000 to bring a district under incentive frame work. (125% weightage for incremental credit flow)

V.Viswanathan

222^nd October 2020