The Reserve Bank of India (RBI) has not agreed to include electric vehicles (EVs) in the priority sector lending (PSL) list for banks, according to Vivek Joshi, secretary to the finance ministry's department of financial services.
"Things like rooftop solar are already there. Regarding EVs, the RBI has not agreed to that proposal so far. We will try and talk to the RBI," Joshi told Moneycontrol in an interview on February 7.
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Joshi's comments come after talk of the same in August 2023 emerged following a proposal from the power ministry. However, the financial services secretary said that such representations cannot always be accommodated.
"How many things will come under priority sector lending? Corporate sector too needs some avenues. There are always demands from all quarters for putting something or the other under priority sector. We might as well review the entire priority sector framework," he said.
Banks must lend 40 percent of their adjusted net bank credit to sectors identified as priority sector, which include agriculture, micro, small, and medium enterprises, education, and housing.
In a wide-ranging interview with Moneycontrol, Joshi also discussed the ongoing troubles at Paytm Payments Bank, the performance of public sector general insurers, and progress made by the National Asset Reconstruction Company (NARCL).
Excerpts from the interview:
Starting with the latest development in the banking space, what can you tell us about RBI action on Paytm Payments Bank?
What can I say about Paytm? It is action taken by the regulator. They regulate the banks. The government has had nothing to do until now when it comes to the actions taken on Paytm. And, we believe that the RBI must have taken the action in the overall interest of the consumer and the economy.
You would have attended the meeting between the finance minister and Paytm founder Vijay Shekhar Sharma on February 6...
I was there in the meeting. But I can't reveal what was discussed as it is a privileged conversation. The sum and substance is that you (Paytm) have to deal with the regulator.
Are there any concerns about data being leaked to China?
I would not be able to comment on that as the RBI and relevant agencies look into the nitty-gritty. I am not the concerned authority.
When it comes to investments, the parent firm, One97 Communications, has a subsidiary that is a payments aggregator. So, the permission that they have sought for investment from China, that is for the payment aggregator subsidiary… That application is under review. It is an inter-ministerial process. It is an FDI issue under the PN3 notification (Press Note 3, which looks to limit 'opportunistic' foreign direct investments from countries that share a land border with India) and it is under consideration.
Does the government have any financial stability concerns due to the action taken by the RBI?
No, it is a very small bank. And its app will continue to operate even after February 29. People can also keep withdrawing money from their Paytm Payments Bank account but can't deposit money in it.
For those who are customers of the payments bank, they will have to shift their account. From what I understand, it is not the bank that will migrate the accounts. The customers will have to do it.
This is the second incident in recent months in the banking-fintech space, with the first being the BoB World issue…
The issue with BoB World was different. The RBI put some restrictions and gave some instructions which Bank of Baroda fulfilled. There, customers were being on-boarded on the app without being informed. This inflated the number of users and showed greater progress. That's why the RBI punished Bank of Baroda, because a bank runs on trust. There wasn't any financial irregularity there… But it's a question of trust.
Are fintech companies becoming difficult to regulate?
Fintechs are very good in technology and innovations. They are young entrepreneurs from IITs, have an idea, and get backing from angel investors. They are very good. They are small (to begin with). But as they grow, they have to start interacting with the government and regulators.
Suppose I am an MFI (microfinance institution) and I start an NGO and take money from banks or NBFCs and give small loans to people in villages. I don't need a licence for that. But as soon as I become Rs 100 crore in terms of size, I will have to go to the RBI. Then I can't say 'I did great work until now and will continue to do so'. I'll have to follow the law of the land.
So the start-up ecosystem has to understand that as they grow, they will have to keep up with regulations and compliance. If you have a small, home-run import-export business, you don't need a licence. But you can't say that you won't take a licence from DGFT (Directorate General of Foreign Trade) or not pay a duty after growing beyond a certain size. As a player becomes larger, it becomes a risk to the system.
You recently held a meeting on trade financing. What were the concerns and what steps have been recommended?
Consider the payment an exporter receives from abroad. The exporter often needs various documents. In some cases, it can be difficult to get those documents because they are sometimes worried that the ship carrying their goods has gone through some problematic countries or countries that face sanctions. So banks also face issues in such instances and require clarifications from the regulator. There were a total of 22-23 cases and we discussed all those cases at the meeting.
Were issues relating to Red Sea trade disruptions also discussed?
No, the Red Sea as an issue wasn't discussed. I think the commerce ministry is holding a meeting on that in a few days with stakeholders. But with regard to the Red Sea, we have told banks and insurance companies that they should take into consideration the problem because ships are having to go through a longer route. For that, if trade financing or insurance is needed, those cases should be dealt with sensitivity. We have sensitised banks to be practical and not create problems.
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The Standing Committee on Finance has released its report on insurance and talked about composite licences.
It has just come out. We will first have to study the report in detail and see what we can implement.
The draft (insurance) Bill is under discussion within the government. So I think it is a very good moment in which the report has come. We will take into consideration their recommendations. But I think there are already some things that are part of the bill, such as composite licences and capital requirements.
The committee's report has also talked about infusing capital in the public sector insurers...
We have infused a fair bit of capital in them, around Rs 17,500 crore. That has started showing some results. In Q2 (July-September 2023), the performance of the three companies has been very good. All of them are showing profits in Q2. United India Insurance Company had a profit of Rs 204 crore, National Insurance Company had a profit of Rs 425 crore, and Oriental Insurance Company had a profit of Rs 180 crore. In comparison, in 2022-23, they posted losses of Rs 2,800 crore, Rs 3,800 crore, and Rs 4,900 crore, respectively. So, the fact they have returned to profitability, even if its small, is a big achievement. So I would say they are looking up.
Does that mean there is no need for further capital infusion in these three general insurers?
Their solvency ratio is still low. We have been seeking exemption from IRDAI (Insurance Regulatory and Development Authority) for all three. That issue is still there.
But it is not necessary that we have to infuse capital. So far we have been taking exemption from IRDAI. Let us also see how they perform in Q3 (October-December 2023) and Q4 (January-March 2024). Their third quarter results should be out in three-four days I think.
But there is an understanding in the government that if they perform well, based on their performance, the government might think of putting some capital into them. But it is not right that we keep putting money in them and they don't perform well.
What about the capital status of public sector banks? They have not needed any capital for three years now. Have we reached a stage where PSU banks don’t need the government’s support at all?
No capital, that has been very clear. They have made record profits. They have given dividends of Rs 13,000 crore.
What about the government diluting its stake in PSU banks?
They raise capital themselves, through QIPs (Qualified Institutional Placements) they keep diluting. But the government saying 'privatise' – it is not on the table. It is under discussion – everything is always under discussion within the government. As the DIPAM (Department of Investment and Public Asset Management) secretary was saying, it depends on the appropriate time. The overall decision is taken by them – whoever decides for PSUs also decides for PSU banks.
Since many PSU banks do not meet the minimum public shareholding criteria, exemptions are needed. The current exemption is until August 2025. Will another exemption be needed beyond that?
Yes, that will be needed. It (reduction in government stake) can't happen in one year.
What about the next round of PSU bank consolidation?
No, there is nothing going on right now. When consolidation was done, many banks were under Prompt Corrective Action. There were many restrictions on them. This situation doesn't exist now. The small banks are actually the better performers now, such as Bank of Maharashtra and Indian Overseas Bank.
Who will be the candidates to merge? It will be them only, (and) Central Bank of India. But they are performing well right now. The government has given an enabling environment to the banking sector that has allowed PSU banks to perform well. There is no 'phone banking' at the political level. And at professional level, the selection of Managing Directors and Executive Directors is purely on merit. There is no recommendation from the government. Of course, people can say even the Financial Services Institutions Bureau (FSIB) can be 'managed'. But it is impossible.
Does the government want to do the privatisation of PSU banks before the next leg of consolidation in the sector?
Like I said, right now it is about wealth and value creation. So, at what stage a decision is taken, the government will look at the market also. And we have elections coming up. Even if the same government comes back, the thought process can also change.
Is there an argument that India needs several large banks, and not just one?
Our banks are large now. Within PSUs, apart from State Bank of India, we have Bank of Baroda, Canara Bank, and Punjab National Bank. These are not small banks. OK, globally they may not be big. But then you have HDFC Bank and ICICI Bank. They are in that category. So there are three big banks. We have to count the private sector too.
What is the status of the legal changes needed for the privatisation of PSU banks? Does the Prime Minister's Office have to give its approval?
It is not with the PMO. It is under discussion here with us. There is no formal proposal…
The draft amendment will not take too long to do. It will be done when the time is appropriate. It is a call that will be taken when it is taken.
What about the privatisation of the general insurance company?
The legal amendment has been done. Now, the ball is in DIPAM's court. They will have to identify which (public insurer to privatise). Of course, when the inter-ministerial committee is formed, we will be there on it. But we have done our work and handed it over.
What is the status of the power ministry's proposal to include electric vehicles in the priority sector lending category? And more broadly, is the government thinking of incentivising loans to ESG (environmental, social, and governance) sectors?
The government is already promoting ESG. There is a lot of focus on non-conventional energy even in the interim Budget. Some banks have been asked to create verticals…some private banks have verticals. SBI has, maybe the smaller banks don’t have. Banks have also issued Green Bonds – SBI, NABARD, EXIM Bank. Even the Government of India has issued Green Bonds. So the government's emphasis is there.
Regarding Priority Sector Lending, things like rooftop solar are already there. Regarding EVs, the RBI has not agreed to that proposal so far. We will try and talk to the RBI.
But how many things will come under Priority Sector Lending? What will we remove? PSL lending is 40 percent. Corporate sector also needs some avenues. There are always demands from all quarters for putting something or the other under priority sector. We might as well review the entire priority sector framework.
What about National Asset Reconstruction Company (NARCL)?
So far, NARCL has acquired eight accounts worth Rs 58,000 crore. The target was Rs 2 lakh crore. And Swiss Challenge (an auction method process) has been initiated for two accounts worth Rs 10,000 crore. Swiss Challenge in a further nine accounts worth Rs 20,000 crore is to be initiated. So, in total Rs 88,000 crore. By the end of 2023-24, I think NARCL will be able to complete around Rs 1 lakh crore.
Then there are another 23 accounts worth around Rs 60,000 crore on which NARCL has started doing its due diligence. Hopefully they will do Rs 2 lakh crore by end of 2024-25. That is the target they have been given. They are picking up speed, monitoring from the ministry is happening, we have made some changes in management, and the Finance Minister has held a meeting. All of this is bringing results.
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