Trading in PSL Certificates: Step towards financial inclusion

Naresh MakhijaniThe Reserve Bank of India’s (RBI’s) recent instructions, which allow banks to purchase and sell Priority Sector Lending Certificates (PSLCs) at a market-determined fee on an electronic platform, have been announced at an opportune time. One of the top priorities of the government being to spruce up rural areas with regards to the economy, education and sanitation, PSLCs are expected to help increase the footprint of banks in the rural sector. Secondly, RBI’s instructions allow banks to buy PSLCs, without an underlying credit risk, issued by those banks that have overachieved their Priority Sector Lending (PSL) overall target (i.e. 40 per cent of the adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher) and sub-targets prescribed in the PSL norms (e.g. 18 per cent for agriculture, 7.5 per cent for micro enterprises, 10 per cent for weaker sections, etc.). This might improve cost efficiency, help ensure enhanced credit flow to the desired sectors and form a very important success element particularly in the area of financial inclusion. Also, lending to meet PSL targets at times is unprofitable for the lender bank and hence, by issuing PSLCs, the lender bank can sell such PSLCs at a high price. This can help the seller of PSLCs/lender banks to fulfil their PSL norms at a lower cost.In fact, banks with a surplus of PSL stand to improve their profitability. These banks can leverage on their strengths and get rewards in the form of fees. Both domestic and foreign banks in the country, that have not met their PSL targets, can avail such PSLCs. These certificates also recognise or reward the competence of those banks who have exceeded their PSL target. The RBI Governor, Raghuram Rajan in his report ’A Hundred Small Steps - Report of the Committee on Financial Sector Reforms’ suggested that the role of the government, charities and Non-Governmental Organisations (NGOs) is to create a vibrant market for such PSLCs and provide support to the market premium of these securities. However, the current instructions of the RBI are silent on these roles. PSLCs could create greater certainty amongst the lenders with respect to the rewards associated with lending to these sectors. PSLCs are hopeful of triggering financial inclusion, an important feature of a dynamic emerging market like India. As achieving lending targets to the priority sectors gets a flexible push, it aims to not only strengthen the banking sector, but also improve the rural canvas of India. Foreign banks in India, generally tend to shy away from lending to the Indian rural or agricultural market. Their inhibition is not just because of the high risks associated with the rural economy, but also their unfamiliarity with the unorganised nature of the sector. However, with the introduction of PSLCs, these banks shall leverage upon their pending PSL targets. Similarly, domestic banks which earlier found it difficult to achieve their PSL sub-targets for direct agri-lending on account of small and fragmented landholdings, shall stand to gain as well.Since the trading of PSLCs can be conducted through a steady/coherent platform, it is expected to help banks overcome multiple challenges. Overachieving banks with a niche in lending to priority sectors such as the MSMEs, could leverage their strengths in the secondary market. The flexibility given to these banks to issue and sell certificates also projects the Indian government’s commitment towards achieving the ease of doing business, and positively fuelling the rural economy. Author is Partner and Head, Financial Services, KPMG in India.The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.