Demand for loans to priority sectors is expected to increase

According to a Motilal Oswal report released on Friday, the trading volume of Priority Sector Lending Certificates (PSLC) increased by 12.4% to reach ₹6.6 trillion in FY2022, compared to 25.9% growth in FY21.

In recent years, major private banks have grown their PSL portfolio faster than aggregate loans. PSL loans for the four major banks, excluding ICICI Bank, grew faster than overall loans due to slower business loan growth. Public banks too, with the exception of the National Bank of Punjab, have seen a trend of higher growth in PSL advances.

Among private sector banks, the gap between PSL loan growth and total advances is highest for Axis Bank, followed by Kotak Mahindra Bank and Indusind Bank, according to the report.

PSL refers to compulsory loans given by banks to marginal small farmers and economically weaker sections. Banks must lend at least 40% of their loan to the PSL category, while Small Financial Banks (SFBs) are required to extend 75% of their Adjusted Net Bank Credit (ANBC) to sectors eligible for classification as PSLs by the Reserve Bank. Failure to comply with this loan will result in criminal prosecution.

In terms of asset quality, the PSL portfolio of private banks is better placed than that of public sector banks due to the better underwriting skills of the former. The gross non-performing assets (GNPA) for the priority sector loan portfolio of large private banks range between 1.9 and 2.7%, while for the PSU banks, the NPA of the PSL portfolio ranges between 7.5% and 19.9%, the report adds.

In terms of buying and selling priority sector loan certificates, private banks are much more active than PSU banks in meeting their PSL targets.

While most banks adhere to the general standards of PSLs, the shortfall is made up by buying PSLCs for a fee or by investing the money in rural infrastructure development. fund deposits (RIDF).

According to the report, HDFC Bank was the largest buyer of PSLC in FY22 among private sector banks, while other major banks were net sellers. Within PSU Banks, SBI was the largest buyer of PSLC while Canara Bank and Indian Bank were significant sellers.

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