Dealing in Priority Sector Lending Certificates (PSLCs)

[This post answers many questions like ‘What is a PSL certificate?’, ‘Who needs PSLCs?’, ‘How the limit for issuance of each category of PSLC is decided?’ ‘How the PSLC transactions are computed for the determination of PSL target/sub-targets?’, ‘Is there any expiry date for PSLCs?’, ‘Whether the loan assets or risks of loan defaults are transferred alongside the selling of PSLCs?’, ‘How scheme is beneficial to the original lender who sells PSLCs?’, ‘How does PSLC dispensation come as a breather to the buyers of it?’ etc.]

What is a PSL certificate?

The scheduled commercial banks, Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks,  Urban Co-operative Banks, and other lenders including microfinance institutions, registered moneylenders, etc. who have made loans to eligible categories under priority sector lending would be eligible to get ‘Priority Sector Lending Certificates’ (PSLC) for the amount of their loans.  The designated verifying authority viz. NABARD or its agents would verify the rules like whether the loan granted by an organization falls under the category of priority sector advance, whether the organization followed the norms of rate of interest chargeable for such loans, whether the loan duration is greater than 180 days etc. After the primary verification from the verifying authority, the concerned bank or financial institution is allowed to self-certify the certificates subject to periodic random monitoring of the issuance of such certificates from the authority. The PSL certificates so issued can be bought by the other banks who find the shortfall in fulfilling the Priority Sector Lending (PSL) targets/sub-targets.

Who needs PSLCs?

The scheduled commercial banks, Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks and Urban Co-operative Banks need to buy these certificates to the extent of shortfall in fulfilling their priority sector targets and sub-targets.

How the limit for issuance of each category of PSLC is decided?

The PSL certificates are issued in four different categories viz.   ‘PSLC – Agriculture’,  ‘PSLC – Small & Marginal Farmers’,   ‘PSLC – Micro Enterprises’ as well as ‘PSLC – General’. Although the PSLCs are issued against underlying assets, banks and financial institutions are allowed to issue only 50 per cent of their PSL achievements of each category in the previous year, notwithstanding the value of underlying assets in their books. These certificates will have a standard lot size of Rs.25 lakh and multiples thereof. The banks can buy specific categories of PSLCs to the extent of deficit in target/sub-target to be achieved by them.

How the PSLC transactions are computed for the determination of PSL targets/sub-targets?

The PSLC instruments of different categories would be traded in the PSLC market through e-kuber portal of RBI. The face value of PSLC would denote the equivalent of the PSL that would get deducted from the PSL portfolio of the seller and added to the PSL portfolio of the buyer bank. The fee paid for the purchase of the PSLC would be treated as an ‘Expense’ by the buyer and the fee received for the sale of PSLCs would be treated as ‘Miscellaneous Income’ by the seller.

Both the buyers and sellers of the PSLCs shall submit the report, having the details of the sum of outstanding priority sector advance in their books, the position of PSLCs bought and sold as of the reporting date, to the Reserve Bank of India towards the fulfillment of their targets. The computation will be done separately where sub-targets are prescribed as on the reporting date.  In case any shortfall is experienced after trading of PSLCs in achieving the targets or sub-targets, such banks are required to cover the extent of the shortfall by investing in RIDF and other funds as hitherto.

Whether the loan assets or risks of loan defaults are transferred alongside the selling of PSLCs?

The PSLCs are traded without transferring either the risks or the loan assets to the buyers.  The loans would still be on the books of the original lender. No loss would be passed on to the buyer of the certificate in case of loan defaults.

Is there any expiry date to PSLCs issued by a bank?

All PSLCs issued by a bank will expire on 31^st March and will not be valid beyond the reporting date of 31^st March, irrespective of the date it was first sold. For example, PSLC purchased by a bank on 30^th March is valid only up to 31^st March of that year. On 1^st of April, the original priority sector lending position of the bank will be back to square as the addition/deletion of PSLC amount to the original lending shown on reporting date 31^st March, will be removed.

How scheme is beneficial to the original lender who sells PSLCs?

The scheme allows the most efficient lender who holds surplus PSLCs after achieving the target in certain category of PSL, to sell such PSLCs at a market determined fee. The fee so collected from selling the PSLC is an extra income to the original lender in addition to the usual interest income from the loans. Since the PSLCs sold would expire on the last day of the financial year (31^st March), the lender of Priority sector loans are eligible to issue fresh PSLCs in the next financial year to the extent of 50 percent of their PSL achievements in the previous year.

How the PSLC dispensation comes as a breather to the buyers?

At present, several small and large size banks in India find it difficult to meet their priority sector target and sub-targets, due to various reasons like geographical disadvantage, non-availability of eligible borrowers in their domain operations, etc. Therefore such banks as a last-ditch, used to buy non-remunerative Rural Infrastructure Development Bonds (RIDF) and other funds at the end of the year. Besides, from the financial year 2016-17 onwards, there is no scope for making investment decisions at the year’s end, as priority sector non-achievement will be assessed by RBI on a quarterly average basis instead of an annual basis.

In light of now finding a non-burdensome way to fulfill PSL targets, as set with new norms, banks can efficiently utilize their resources in their strong business domains, without worrying about PSL targets.

Note: The PSLCs are different from the Inter-bank participation certificates (IBPCs). The IBPCs are a form of securitization of loans through which a bank buys the assets of another bank for a stipulated period. In IBPCs, the buyer has to take on the credit risk of the loans, which is high in the case of the underserved priority sector. Further, the loans to be securitized have to be standardized, well-documented, and serviced. This may also be a problem in the case of loans to the needy and poor. On the other hand, the PSLCs separate the objective of transferring priority obligations from the credit risk transfer and refinancing aspects.

Related articles:

What are the latest guidelines on Priority sector lending and targets?

Classification of priority sector advances: Overdraft in PMJDY accounts
Revision of Housing Loan qualifying Limits for Priority Sector Lending
What is the concept of Priority Sector Lending?