Rules tightened for classifying gold-backed farm loans as PSL
MUMBAI: RBI has proposed tighter rules for classifying gold-backed farm loans as priority sector lending (PSL), requiring banks to verify borrowers’ actual agricultural credit needs against the district scale of finance for the crop. Banks would also have to document field inspections, crop hypothecation and evidence of agricultural activity by landless cultivators failing which loans will be classified as the more expensive gold loans.Under RBI’s consolidated priority sector instructions, the draft of which was released on Thursday, a major proposal would prevent banks from excluding trade bills discounted under letters of credit from adjusted net bank credit (ANBC) when calculating PSL obligations. While such exposures can be treated as interbank credit for capital adequacy and the Large Exposure Framework, the underlying credit goes to the constituent borrower and qualifies as domestic bank credit under Form A of the RBI Act. The draft would restrict interbank treatment to capital adequacy calculations.The change could raise banks’ lending obligations. Every Rs 10,000 crore of discounted bills retained in ANBC would increase the 40% PSL requirement by Rs 4,000 crore. The additional obligations would include Rs 1,800 crore for agriculture, Rs 1,400 crore for non-corporate farmers, Rs 1,000 crore for small and marginal farmers, Rs 750 crore for micro-enterprises and Rs 1,200 crore for weaker sections. The farmer sub-targets overlap with the overall agricultural target.Corporate banks could face a compliance gap because bills discounted for conglomerates, infrastructure contractors and wholesale vendors would expand the ANBC denominator without adding eligible PSL assets.Only bills involving qualifying borrowers, such as MSME suppliers, would contribute to PSL achievement. Banks may therefore need additional rural lending or PSLC purchases.The financial burden could be significant for corporate bill discounting, which typically earns spreads of 50-90 basis points. Banks may have to buy PSLCs at 80-120 basis points or place funds with development finance institutions at 200-400 basis points below the Bank Rate. They could pass on 15-30 basis points of additional compliance costs to corporate borrowers.
