Mumbai, March 4, 2018

The Reserve Bank has further tightened the priority sector lending (PSL) norms for foreign banks by directing them to mandatorily create sub-targets so that they lend a portion of their loans to small and marginal farmers as well as micro enterprises from April.

The move, directed at foreign banks with over 20 branches will impact the likes of Standard Chartered, Citi and HSBC, which much higher branch presence, and will come into force from the next financial year. The PSL norms mandate foreign banks to eventually lend 40 per cent of their total loan book to the priority sector, such as agriculture, rural infra, and MSMEs among others from April 2020.

In a notification over the weekend, RBI has said a sub-target of 8 per cent of net bank credit, or credit equivalent amount of off-balance sheet exposure, whichever is higher, “shall become applicable for foreign banks with 20 branches and above, for lending to MSMEs from FY19.” Another sub-target of 7.50 per cent, using the same criterion, will be applicable to these banks from FY19 for lending to micro enterprises. But in a partial relief, the apex bank removed the prior condition that only loans of up to Rs 5 crore and Rs 10 crore given to MSMEs would be PSL-compliant.

The notification further said “all bank loans to MSMEs will now qualify under PSL without any credit cap.” According to RBI priority sector include medium enterprises, social infrastructure and renewable energy, apart from agriculture and other existing categories. It can be noted that PSL has been a bone of contention for foreign banks all these while, and the latest move will only further anger them as not meeting the new targets will further prevent them from expanding their branches. Foreign banks have been citing their lack of knowledge of the rural markets to lend all these years, while RBI has been linking rural expansion as a pre-condition for more urban presence.

And to meet their PSL targets, they often buy loans from microfinance and other NBFCs. However, it can be noted that most large MNC banks have been winding down their brand presence in the country and have been focusing more on branchless banking. According to a November 2017 report by the RBI, foreign banks are slowly reducing their presence in the country. The number of MNC bank branches came down from 317 in FY16 to 286 in FY17.

[The Financial Express]