Pvt Banks Lap Up PSLCs for Priority Loans
Instrument estimated to have received trades worth .₹ 40k crore in first quarter
Kolkata: The new priority sector lending certificates (PSLCs) — which are being traded through a Reserve Bank of India-promoted platform — appear to have caught the fancy of treasury heads of banks, especially in Citibank India, HDFC Bank and Yes Bank, with the PSLC market estimated to have seen .₹ 40,000 crore worth of trades in the first quarter.
Banks, with deficit in priority sector loans, can buy PSLCs from banks with surplus priority loans to bridge the gap for a fee and without any real transfer of assets. This instrument, introduced last fiscal, has substituted the complex securitisation or direct assignment structures for buying or selling priority sector loans. PSLC is being traded exclusively between banks while non-banks aren’t allowed to do so.
Experts feel that the new mechanism may bring some challenges to the securitisation market, at least initially, with the first quarter volume of securitisation falling about 15% to .₹ 15,000 crore, compared with .₹ 17,000 crore in the year-ago period, according to an estimation by Crisil.
“The introduction of PSLCs in the early part of fiscal 2017 is estimated to have had a negative impact on both securitisation and inter-bank participation certificate (IBPC) volumes. Given the ease of purchase and absence of risk transfer, PSLCs quickly gained currency,” Crisil said.
“There has been substantial demand for PSLC from private banks and foreign banks, especially the foreign ones with less than 20 branches as they are mandated to increase their priority sector loan proportion by 2% annually till 2020,” said Ajit Velonie, director at Crisil Ratings.
Last fiscal, about .₹ 49,800 crore of PSLCs were traded among banks — bypassing the securitisation and IBPC routes — to meet their priority-sector lending mandate. Despite this, securitisation volume last fiscal grew 47% year-on-year to .₹ 1,02,500 crore, riding on transactions of non-priority sector loans.
Securitisation, on the other hand, is done through pooling of loans and selling them to another lender by issuing pass through certifica- tes issued by trusts or special purpose vehicles, or selling them bilaterally via a process called direct assignment of loans.
“PSLC is preferred over other instruments, as they allow banks to leverage on their strength in a particular segment of priority lending such as agri lending, small farmer financing and MSMEs (Micro, Small & Medium Enterprises). It also incentivises banks having surplus in their lending to priority sector categories by way of earning premium on selling the PSLC,” said Sumit Gupta, Yes Bank’s national head for business & rural banking.
No capital provisioning is required as this is an off balance sheet investment, whereas IBPC, securitisation and DA require capital provisioning, Gupta said. “Furthermore, the transactions are completely digitalised and enables market dynamics to decide on the pricing of the instruments.”
The Crisil study showed that around 55% of the PSLCs traded are related to loans to small and marginal farmers. Bandhan Bank, with about 90% of their .₹ 21,400 crore loan portfolio being contributed by micro loans, has sold loans worth .₹ 1,000 crore using PSLCs in the past two quarters. “The biggest advantage is our portfolio does not get reduced even after selling the PSLCs,” its managing director Chandra Shekhar Ghosh said.
Experts feel that the new mechanism may bring some challenges to the securitisation market, at least initially