- The Reserve Bank has tightened the rules around priority sector lending (PSL), now requiring external auditor certificates from intermediaries to avoid the double-claiming of loans.
- This decision comes just two days after two major private sector banks revealed that the regulator had identified discrepancies in their PSL classification of agricultural loans and instructed them to set aside additional provisions.
- By tightening these norms, the RBI aims to ensure that credit flows effectively to priority sectors by improving monitoring and internal controls.
- It’s worth noting that last Saturday, HDFC Bank and ICICI Bank acknowledged that the RBI had asked them to make additional one-time standard provisions of Rs 500 crore and Rs 1,283 crore, respectively, in their accounts for the December quarter.
- This was due to the misclassification of some of their agri-related accounts as PSL loans, which actually did not meet the PSL criteria.
The Reserve Bank has tightened the rules around priority sector lending (PSL), now requiring external auditor certificates from intermediaries to avoid the double-claiming of loans. This decision comes just two days after two major private sector banks revealed that the regulator had identified discrepancies in their PSL classification of agricultural loans and instructed them to set aside additional provisions.
By tightening these norms, the RBI aims to ensure that credit flows effectively to priority sectors by improving monitoring and internal controls.
It’s worth noting that last Saturday, HDFC Bank and ICICI Bank acknowledged that the RBI had asked them to make additional one-time standard provisions of Rs 500 crore and Rs 1,283 crore, respectively, in their accounts for the December quarter. This was due to the misclassification of some of their agri-related accounts as PSL loans, which actually did not meet the PSL criteria.
The new compliance framework mandates that all intermediary lenders—such as microfinance institutions, non-bank finance companies, and housing finance companies—must provide external auditors’ certificates to confirm that no loan is being claimed as a priority sector loan by more than one bank at the same time.
This directive follows the RBI’s recent amendments to the ‘directions on priority sector lending – targets and classification,’ which were issued today.
To determine the priority sector status of the underlying portfolio, banks can rely on a mix of external auditors’ certifications from the originating entity and conduct sample checks by their own staff or an auditor for verification. This process may be outlined in their internal policy, as stated in the amended master direction released on Monday.
Lenders can take advantage of the PSL classification for loans given to NBFCs, as long as the assets financed by these loans qualify as PSL eligible assets. This special provision for lending banks will only apply to the actual outstanding balance that is backed by existing underlying assets as recorded in the opening balance sheet of the SFB, and it will remain in effect only until the underlying loans are repaid.
The new guidelines also allow banks to classify export credit to agriculture and MSMEs as PSL loans within their respective categories, adhering to the overall limits specified.
Domestic commercial banks have a PSL target set at 40%, while foreign banks with 20 branches or more have a target of 20%. For those with fewer than 20 branches, Regional Rural Banks and Small Finance Banks are also included.
Loans that banks provide to MFIs can be categorized as PSL under the relevant categories—agriculture, MSME, social infrastructure, and others—provided that the MFIs meet the RBI’s requirements and banks secure external auditors’ certificates from the MFIs. This ensures that the on-lending benefit for these loans hasn’t been claimed from any other bank.
Additionally, banks must obtain external auditors’ certificates from the NBFCs to confirm that the on-lending benefit for these loans hasn’t been claimed from any other bank. Furthermore, bank credit to housing finance companies, which is approved by the NHB for refinancing, for the purpose of purchasing, constructing, or reconstructing individual dwelling units or for slum clearance and rehabilitation of slum dwellers, will also qualify for PSL classification, subject to a maximum loan limit of Rs 20 lakh per borrower.
Banks are required to keep detailed records of the underlying portfolio for each borrower and obtain external auditors’ certificates from the HFCs, confirming that the on-lending benefit for these loans hasn’t been claimed from any other bank.
Lastly, banks are allowed to engage in co-lending arrangements to help meet their PSL targets.
Banks are required to provide data on priority sector advances every quarter and annually, following the designated reporting format. This information should be submitted within fifteen days after each quarter and one month after the financial year ends.
Additionally, the regulator has put a stop to service charges on PSL loans, which includes any guarantee fees associated with credit guarantee schemes. For priority sector loans up to Rs 50,000, ad hoc service charges or inspection fees will be applicable. When it comes to eligible priority sector loans for Self-Help Groups (SHGs) or Joint Liability Groups (JLGs), this limit will apply to each member individually, rather than to the group as a whole.