RBI Eases Priority Sector Lending Norms for SFBs
The Reserve Bank of India (RBI) has recently relaxed the priority sector lending (PSL) norms for small finance banks (SFBs). This change reduces the PSL target from 75% to 60%. This regulatory adjustment aims to provide SFBs with greater operational flexibility. It allows these banks to diversify and manage their loan portfolios more effectively. The relaxation is expected to free up approximately ₹40,000 crore for SFBs. This capital can now be used for lower-rated risk and secured assets.
Priority Sector Lending
Priority sector lending is a regulatory measure that mandates banks to allocate a specific portion of their lending to certain sectors. These sectors include agriculture, micro, small and medium enterprises (MSMEs), education, housing, and others. The objective is to ensure that essential sectors receive adequate credit support.
Changes in PSL Norms
Under the new norms, SFBs are required to allocate 60% of their adjusted net bank credit (ANBC) to priority sectors. Previously, the requirement was 75%. The allocation now allows for more flexibility, with 20% of ANBC designated for sectors where SFBs have a competitive edge. This shift is expected to encourage SFBs to explore new lending opportunities, including loans against property, personal loans, and vehicle loans.
Impact on Small Finance Banks
The relaxation of PSL norms is anticipated to benefit SFBs that faced constraints under the previous regulations. With the new framework, SFBs can diversify their loan books. This diversification can help improve asset quality, especially as many SFBs have microfinance portfolios. The changes may also encourage more non-banking financial companies to apply for SFB licences.
Future Prospects for SFBs
The revised PSL norms are expected to influence SFBs’ strategies over the next two to three years. Banks can now plan to diversify their lending operations. This includes venturing into areas such as automobile loans and loans against shares. While immediate financial impacts may not be evident, the long-term benefits could enhance profitability and stability.
Conversion to Universal Banks
The RBI has also introduced norms that allow SFBs to convert into universal banks voluntarily. Currently, there are 11 SFBs in India, with three having applied for conversion. This pathway aligns with the RBI’s vision for SFBs and encourages banks to expand their asset classes and geographical reach.
Priority Sector Lending Certificates
The new regulations will enable SFBs to earn profits by selling priority sector lending certificates (PSLCs). This is particularly relevant for banks that fall short of their PSL targets. Selling PSLCs in the small and marginal farmer segment can provide additional revenue streams for SFBs.
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