By Bindu Ananth & Nachiket Mor
There has been much discussion recently about the distorting nature of various indirect subsidies such as those being offered via price controls on fuel and fertiliser.
There is a case to include in this important debate the subsidies implied via financial sector policies, in particular, priority sector lending (PSL) requirements that guide the allocation of 40% of net bank credit (NBC). One of the significant bottlenecks to the growth of the Indian economy has been the small size of the financial sector.
The PSL requirement may then be viewed not necessarily as a subsidy but as a ‘policy nudge’ to bankers that amongst the various equally profitable opportunities that they are faced with, they should give higher priority to the PSL sectors, in larger national interest. Eventually, we need to increase the size of the financial sector and to complement banking sector resources with local debt capital markets as well so that all sectors can optimally absorb credit.
Above is an excerpt from an article published today in The Economic Times. To read the full article click here.
Absolutely
-there is an urgent need to align PSL norms with the needs of the real economy
As a former employee of Public Sector Bank, I always found that there will be
spate of internal circular instructions in Feb-March each year reminding branches to lend under PSL
to cover shortfall. Hence it is for RBI recast their monitoring mechanism, as
stated in the article. PSL guidelines have been tweaked many a times only to
ensure that funds are directed to micro and small sector but the overall sectors
remain unchanged
Excellent and Timely article, that the Policy Makers and Regulators
may please make a note for revising the PSL guidelines. Here are of my comments/suggestions.
1.
People who are excluded from the formal banking
system (including the people with no-frill saving banking accounts), are
investing their valuable little saving in the form of Gold, invest with chit fund
companies. Should they don’t invest in very high return- fly by night
companies, they are safe ,I don’t think they don’t have too much surplus every
month to deposit and withdraw from a Bank, but would require lot of credit
/insurance, rather than a saving banking account/FD giving 6 to 10% returns.
2.
As per recent regulation in NBFC-MFI, only 70%
needs to be in Income generating sector and 30% can go for other purposes,
which include health, education, etc of the Microfinance clients. There is
always a debate what is the right ratio, is it 70:30, or 60:40, or 50:50, and
may be depending on local dynamics.
3.
Capital intensity for certain States, may
largely depend on priorities of the governance at the State level, including robustness(
and corruption levels) of the State machinery(bureaucrats )
4.
Excellently put forward on the PSL targets being
measured on the last Friday of March. As most irrigated areas are double
cropped and almost for 10 or more month a year, there is a standing crop. With
CBS in place in most banks, I don’t think why this should not be fortnightly
reporting.
5.
There is always a debate, whether this PSL
funding reaches the right person, be it direct Agri, msme or weaker section
loan. Measurement/audit process by the Regulators needs to be transparent and revisited,
we don’t often hear any bank penalised for false reporting. I’m sure lot of the
beneficiaries of the Debt waiver scheme (2008), are not the real intended
persons. Most Gold loans are classified as direct Agri, and all those who
availed/availing gold loan from certain banks are the beneficiaries of reduced
interest rates(also principal waiver if announced).
6.
Through Audit into KCC accounts will, ensure that
it is given to real Farmers. On the
Other hand, repayment to the Banks is the last priority of the Farmers for
varied reasons, some of which would be genuine.
7.
Of late
the Regulators are pushing the Banks, for direct credit delivery to the
Farmers/other beneficiaries. But there is NO viable Business correspondence
model in place even after 7 years of piloting. If any banker is asked, they
always complain of shortage of manpower. But to my sense, there is no product
with proper pricing, which mitigates the credit risk and ensuring follow-up, so
that the loan amount is repaid. Unless the formal banking system is geared with
right product, people and process, any amount of reducing the credit flow to
Gold loan NBFC/ tightening funding to MFIs, would not yield desired result, but
will make people to borrow from Money lenders at High cost.
Thanks for sharing your detailed comments Senthil
Well said. Non mainstream financial institutions/MFIs being one of the vehicle to for PSL lending suffer from March Syndrome and this adds to systemic risk for their portfolio.