RBI’s Relaxation of Priority Sector Lending (PSL) Norms for Small Finance Banks (SFBs)
The Reserve Bank of India (RBI) has relaxed the PSL norms for Small Finance Banks, reducing the overall PSL target from 75% to 60%, providing these banks with greater operational flexibility.
Implications of the Relaxation
- This change allows SFBs to diversify and derisk their loan portfolios by entering segments they previously avoided.
- The regulatory adjustment is expected to free up approximately ₹40,000 crore, which SFBs can now redirect into lower-rated risk, secured assets.
Potential New Lending Segments
- Loans Against Property (LAP)
- Personal Loans
- Vehicle Loans
- Loans Against Mutual Funds
Regulatory Changes
- Previously, an SFB had to extend 75% of its adjusted net bank credit (ANBC) to PSL-eligible sectors.
- 40% of ANBC was allocated to specific sub-sectors with the remaining 35% to sectors where SFBs have a competitive edge.
- Now, the RBI has reduced the additional component to 20%, making the overall PSL target 60% of ANBC or equivalent off-balance sheet exposures.
Benefits and Strategic Opportunities
- This decision is likely to encourage more non-banking financial companies to apply for an SFB license.
- With the extra room, SFBs can plan for diversification over the next two to three years.
Long-term Vision and Strategic Goals
- Diversification will assist SFBs in preparing for conversion into universal banks.
- The addition of new asset classes and geographical areas aligns with the RBI's vision for differentiated SFB licenses.
Profitability Considerations
- While diversification might not increase margins, it will enhance asset quality and provide comfort, especially given the challenges in microfinance portfolios.
- SFBs can earn profit by selling PSL certificates in the small and marginal farmer segment.
Conclusion
The relaxation of PSL norms is anticipated to provide SFBs with increased operational flexibility and strategic opportunities, although it may not significantly impact their immediate profit and loss statements.
