RBI tightens priority lending rules for foreign banks.

MUMBAI: Large foreign banks in the country will be forced to slow down with the Reserve Bank of India imposing stiffer rules on lending to priority sectors like agriculture and small and medium businesses.

The 40% priority sector lending till recently was restricted to local banks, while it was 32% for foreign banks, but the RBI revised the target for priority sector loans for foreign banks with more than 20 branches to 40% and even abolished the export credit option, causing disaffection among banks like Standard Chartered, Citi and HSBC.

The new rules take effect in five years. "The regulations are saying we have to go to 40% in five years, while our balance sheets are doubling. We don't think it is either sensible or achievable," Stuart P Milne, chief executive officer at HSBC India, had told ET in an earlier interaction.

Milne said disallowing export finance as part of priority sector lending would dry up lending in that space as margins are thin. "That means the three big foreign banks are not going to lend, which may be an unintended outcome," he had said.

Foreign banks have requested the central bank to give them additional time to meet the new norms and had also asked the RBI to widen the priority sector basket to include loans to infrastructure as well, but the central bank refused to oblige. Commercial bank credit to agriculture, small and medium enterprises, micro credit, education loans and housing loans at the end of February 2013 stood at Rs15,07,100 crore.

"Priority sector also includes mortgage loans, which is a great opportunity. I feel a regulator or a government today can't get away from what the priorities of the country are," said Kalpana Morparia, chief chief executive officer, India and South Asia, JP Morgan. "We should encourage the requirement to be met by investing in relevant securitisation structures.

Securitisation is not a bad word. I know it became a bad word post the western financial crisis. The RBI always had this policy of risk retention and amortising of gains," said Morparia.

"With restrictive branch licensing norms and delay in finalisation of foreign bank subsidarisation norms, it is unfair to expect foreign banks to meet the 40% priority sector target," said a senior foreign banker, requesting anonymity. "The only way to circumvent this is to restrict your branch network to below 20," he said.

The RBI limits the number of bank branches that all foreign banks can open annually to 14, and has been encouraging foreign banks to open branches in smaller towns to push the financial inclusion agenda, which isn't going down well with most banks.

"We don't want to open branches in smaller cities. The economy is only growing at 5%," Milne had said. "We have reasonable coverage in major cities and we need to make these branches work for us. Being in smaller cities is not particularly attractive," he had said. "This is a learning. We have set up branches in small towns like Chindwara and Dayalbaug and are looking at few other centres. These may be associated with few industries as well.

It is one of the largest PSL (priority sector lending) generators for a private bank," said Sunil Kaushal, regional chief executive, India & South Asia, Standard Chartered Bank.


Source : timesofindia.indiatimes.com