Finance Ministry to review PSU banks' loan book

The finance ministry is likely to review the loan portfolio of public sector banks to ensure they are lending directly to the priority sector and not buying loans from regional rural banks (RRBs) or microfinance institutions (MFIs) to meet their mandatory lending requirements.

The ministry is scheduled to hold the review later this month, a finance ministry official said.

According to the Reserve Bank of India (RBI) guidelines, banks are required to lend 40% of their adjusted net credit to the priority sector, which includes agriculture, small-scale industries and other weaker sections.

If they fall short of this target, they can buy the loans of RRBs or MFIs to meet the level.

During the annual performance review of public sector banks last year, the ministry had proposed to close the RRB and MFI route for them. Banks, however, opposed the move and promised to increase disbursement to the designated sectors.

"If banks are still lagging in their targets and a major portion (of priority sector lending) is achieved through acquiring portfolios from RRBs, we may look at closing the option," the finance ministry official said.
But most banks are of the view that the government should not worry over their buying out portfolios from RRBs or MFIs.

"In any case, the banks are meeting the targets and exceeding them," a Central Bank of India official said.

Data issued by RBI shows that public sector banks had lent 864,564 crore to the priority sector in 2009-10, about 41% of the net bank credit. Only three state-run banks were not able to meet their priority sector lending targets.

"Besides, RRBs and MFIs have a better understanding of the region, which leads to less loans turning bad," the Central Bank of India official added.

The non-performing assets, or bad loans, of public sector banks in the priority sector stood at 36,507 crore at the end of September 2010, an increase of 18% in six months.

Banks prefer to buy out loan portfolios from RRBs or MFIs as they get only 6% interest on amount deposited with the Rural Infrastructure Development Fund (RIDF).

"If you acquire a portfolio at even 9%, you are sure that there will be some return as strict due diligence has been done on these accounts before lending," said an official with the National Bank for Agriculture and Rural Development (Nabard).

The government has raised the target for lending to agriculture sector by 27% for FY 11-12 to 475,000 crore and directed banks to step up direct lending and increase credit to small and marginal farmers.

At present, if banks are not able to meet their priority sector targets, the shortfall is diverted towards RIDF. In 2009-10, Nabard had disbursed 12,387 crore from the XV RIDF fund.