Targeted lending through priority sector:
The RBI has mandated certain targeted lending as priority sector with specific targets for banks to achieve. Till 2011, banks were allowed to achieve this priority sector targets by refinancing NBFCs (non-banking finance companies) that lend to these sectors.
However, since 2011, banks' refinance to NBFCs for such underlying assets is treated as priority sector lending (PSL) for the banks only if the ultimate lending rate of the NBFC to the end borrower is not more than 8 per cent of the base rate of the Bank. However, the costs and risk of addressing these segments of clients who are typically SRTO (small road transport operators or drivers wanting to become owners) and MSME (micro SME loans in the range of Rs 1 lakh to Rs 10 lakh) is very high and this 8 per cent limit cannot be met.
This has removed the PSL tag for banks' refinance to NBFCs with such underlying asset class and has substantially reduced the flow of funds to these segments. Banks cannot do it directly either since they do not have the ability to reach out to such low end of the borrower pyramid nor manage the risk associated with such direct lending.
Suggestion: The PSL norms need to be reviewed after due consultations with all stakeholders with a view to ensure that sufficient fund flow is ensured to the weaker sections of the society.
Housing finance for EWS and LIG segment of borrowers:
By definition, EWS or economically weaker section means households with less than Rs 1 lakh annual income and LIG or low income group means households with less than Rs 2 lakh annual income. This translates to a monthly household income of between Rs 8,000 and Rs 16,000. Assuming that at least 50 per cent of this would be required for household expenses, this leaves between Rs 4,000 and Rs 8,000 for loan repayment. These households would already have loans running and if we net these, such households ultimately would be able to service loans only in the range of Rs 1 lakh to about Rs 5 lakh at best.
Banks have very limited capability to do a field-based credit assessment of such profiles and manage the risks arising out of such low-ticket loans to EWS/LIG. However, if banks lend to HFCs (housing finance companies) for onward lending to such class of customers, it is treated as PSL for the banks only if the final end-consumer borrowing rate is not more than 2.5 per cent of the base rate of the bank. This is not possible at all since the cost of reaching out to such small borrowers in semi urban and rural areas is high and risk involved is also high.
Suggestion: The PSL norms for banks for lending to HFCs for on-lending to EWS/LIG category of clients should be relooked to make them more practical and useful in directing flow of funds to these sectors for long-term asset creation like homes.
Refinance window from the RBI:
- The RBI should open up a refinance window for NBFCs that are on-lending to PSL compliant customer categories.
- These can be at concessional rates so that the benefits can be passed on to the end borrowers.
- There has to be a margin cap to ensure the benefit of low rates is passed on to the end borrowers. However, while fixing such margin caps, the NBFC industry should be fully involved, so that the actual cost of reaching out to such marginalised society and the associated risk can be fully factored in.
- The refinance window should have an initial corpus of at least Rs 1,00,000 crore so that it can seriously improve the flow of funds through the most efficient vehicle of NBFCs to the marginalised segment of the society.
Setting up of Financial Inclusion Regulatory and Development Authority:
- The government must consider setting up a separate regulatory and development body whose sole objective is to promote financial inclusion in the country.
- This regulator must be the licensing and regulatory body for licensing of small finance banks, payment banks, microfinance institutions or such other entities that may be created principally for the purpose of spreading financial inclusion.
(The author is managing director at Equitas Holdings)