PSLC: A Boost for Income of Niche Indian Banks

By: Divya Vohra

Small finance banks will start operations over next few months and they are planning to use Priority Sector Lending Certificates (PSLC) as a key business opportunity to boot their fee income.

The Priority Sector Lending Certificates are certificates issued by banks that have overreached their priority sector lending targets. PSLCs thus can be issued only up to the extent of their over lening to the stipulated sectors. Buyers of PSLCs are usually those banks who could not meet their priority sector lending targets. The price of PSLCs will be determined on the basis of demand and supply that will be reflected in the auction under the RBI’s e-Kuber trading platform.

As per the RBI guidelines, banks can issue four types of PSLCs including three subsector PSLCs- agriculture, small and marginal farmers, micro enterprises and one PSLC for general.

The RBI guidelines explains the objective of PSLCs and their trading “To enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall and at the same time incentivize the surplus banks; thereby enhancing lending to the categories under priority sector.”

  

Sellers and buyers of PSLCs are: Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks (when they become operational) and Urban Co-operative Banks who have originated PSL eligible category loans subject to such regulations as may be issued by the Bank.

"It will be an important source of consistent quarterly fee income, as 90℅ of our portfolio sector lending towards priority sector lending," said H.K.N. Raghavan, chief executive officer of Equitas Small Finance Bank.

In April 2015, the RBI changed the review period of priority sector lending of banks from annual to quarterly.

"Tenure will decide the pricing of the certificates as it will be used by banks for bridging the gaps in the priority sector targets. For a small finance bank perspective, it is a good fee earning opportunity," said Rajeev Yadav, chief executive officer of Disha Microfin Pvt ltd.

Alok Prasad, former chief officer of Microfinance Institutions Network added, "Selling PSLCs with microfinance loans as the underlying assets is a narrow, short-term opportunity. Looking ahead, the needs is to be able to build a balance sheet with the full range of PSL assets, as per RBI's norms".