Mar 14, 2012, 03.09 PM | Source:

Banks: Mapping priority sector shortfall

Prabhudas Lilladher has come out with its report on banking sector.

Prabhudas Lilladher has come out with its report on banking sector.

The committee report on priority sector (PSL) has proposed stringent PSL norms which may increase bankís PSL shortfall. Though shortfall could be higher, actual investments in RIDF deposits are determined by budgetary allocations and availability/implementation of rural projects with state governments and NABARD. We, thus, met up with the head of the special projects group at NABARD to understand possibility of significant increases in the project outlays and budgetary allocations which could impact banks. Key takeaways:

Recent trends in PSL deposits: Total PSL-related investments by banks has increased to ~US$25bn (3% of system loans) in Mar-11, with ~US$6bn fresh allocation for FY12. ~85% of the investments are still with NABARD and ~15% with SIDBI/NHB. Though outlays on the traditional RIDF scheme (funding state governments) is increasing at a very moderate pace (positive), finance ministry has been allocating shortfalls in other social schemes to be financed through RIDF investments which increases PSLís liability for banks.

Outlook for quantum of PSL deposits: (1) Outlays on traditional NABARD scheme is expected to increase by <10% as most states either do have borrowing power or are not able to implement projects fast enough. (2) But over the last 3-4 yrs, RIDF investments have also been used to fund shortfalls in Bharat Nirman program (Rs160bn) and also re-financing co-op banks (Rs230bn) and risks from funding other social schemes remain. (3) PSL contributes to ~70% of NABARDís funding but only ~25% of SIDBIís/NHBís funding and there is risk from PSLís higher dependence. But overall quantum of funding under SIDBI/NHB is low.

Doubts on relief recommended: Committee has recommended netting existing RIDF investments against part of the PSL shortfall which NABARD believes would not find favour with RBI. Also, our analysis of linking return on RIDF deposits to reverse repo suggest similar through cycle returns (6%- existing RIDF deposit rate and 5.5% through cycle reverse repo rate).

Impact on Banks: Banks have ~3.0% of loan book invested in RIDF deposits, with private banks at ~4.5% and PSU at ~2.0% impacting pre-tax ROAs by 2-10%. We believe outlays on traditional RIDF schemes may not increase significantly in line with PSL shortfalls but a financially constrained government could keep adding new social schemes for RIDF funding. Among Private Banks, ING/J&K/Karnataka/ ICICI Bank /IIB have highest investments in RIDF and though PSUs are better off, Vijaya/Corporation/OBC have high share of RIDF deposits.

Look out for budgetary allocations: Government, in consultation with finance ministry and RBI, decide on allocations for social projects under RIDF in the Budget. Though increase in traditional RIDF schemes has been limited, government has been adding schemes under RIDF-NABARD, including Rs100bn of allocation made last year to refinance co-op banks through NABARD.

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