Small finance banks like AU Small Finance, Ujjivan, Equitas, Utkarsh, etc, will be in focus today after the Reserve Bank of India announced a key relaxation in its priority sector lending (PSL) norms. In this article, we will understand the details of this announcement and its impact on India’s small banking sector.
The Reserve Bank of India (RBI) has cut the mandatory priority sector lending (PSL) requirement for small finance banks from 75 percent to 60 percent of adjusted net bank credit (ANBC).
ANBC is a calculation that is used by both the regulators & banks to determine the amount of credit that should be allocated to priority sectors. PSL norms make it mandatory for the banks to allocate a portion of their lending to specific sectors of the economy, like MSMEs, export credit, education, housing, social infrastructure, renewable energy, weaker sections, etc.
However, SFBs will have to continue to allocate 40 percent towards different sub-sectors under PSL, either ANBC or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE), whichever is higher. After fulfilling the 40 percent requirement, SFBs can now allocate the last 20 percent toward 1 or more PSL sub-sectors in which the bank has a comparative advantage.
According to Morgan Stanley, this is a structural positive for the sector and allows better capital allocation and the ability to pursue new lending opportunities in higher-margin segments. The brokerage expects this would strengthen return ratios and support long-term profitability for SFBs.
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Citi believes the RBI’s move will provide “material structural relief” to SFBs. As Per guidelines, 40 percent of loans will have to follow existing PSL rules, and 20 percent can be assigned to more yielding segments.
Most SFBs have well over 75 percent in PSL, and lended primarily due to the location of microfinance exposure. Citi believes the shift will help ease SFB’s dependence on MFIs and aid in portfolio diversification. This should help improve returns, as well as overall stability for long-term growth.
Overall, this change should benefit SFBs by providing greater flexibility in lending to the extent that they can expand into non-PSL and relatively high-yielding segments such as MSMEs, personal loans, and secured retail lending.
It may also improve overall margins by reducing overall exposure to low-yield PSL categories and increasing portfolio diversification that supports better risk management and sustains growth.
Of the gainers, Equitas Small Finance Bank gained 4.6 percent, while Ujjivan SFB was up 4 percent. Utkarsh SFB increased 4 percent, Suryoday SFB rose 2.47 percent, Jana SFB increased 3.76 percent, and AU SFB was up 1 percent, in response to the Reserve Bank of India’s move to relax priority sector lending guidelines.
Written by Satyajeet Mukherjee
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