Large urban co-operative banks (UCBs) such as Saraswat Co-operative Bank and SVC Co-operative Bank may take a hard look at their co-operative structure in the backdrop of the steep priority sector lending (PSL) target prescribed by the Reserve Bank of India (RBI).
UCBs have to increase their PSL portfolio – comprising loans to agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, among others – so that it accounts for 75 per cent of their advances by March 2024.
So, to align their overall loan composition with the revised PSL norms, large UCBs may either cut/stop growing their wholesale lending portfolio or buy priority sector lending certificates (PSLCs) or do both even as they simultaneously grow PSL portfolio under their own steam, according to a co-operative banking expert.
Conversion into universal bank?
As the PSL target is steep, the larger ones among the UCBs may consider converting into universal banks as and when RBI opens up this route.
As at March-end 2020, there were 88 UCBs with deposits greater than or equal to ₹1,000 crore and 50 UCBs with advances greater than or equal to ₹1,000 crore, per RBI data.
Currently, though RBI allows UCBs to convert into small finance banks (SFBs) under the Scheme of Voluntary Transition, large UCBs do not see any advantage in doing so.
PSL and minimum capital adequacy ratio (CAR) for SFBs are both high at 75 per cent (of advances) and 15 per cent (of their risk weighted assets/RWA), respectively.
While PSL target for UCBs will get aligned with that for SFBs by March 2024, they are required to maintain a lower minimum CAR of 9 per cent (under Basel I norms) of their RWA.
UCBs have to reach the PSL target in phases — 45 per cent by March 2021 (from 40 per cent as at March-end 2020), 50 per cent by March 2022, 60 per cent by March 2023 and 75 per cent by March 2024.
PSL portfolio: Where it stands
As at March-end 2021, Saraswat Bank and SVC Bank increased their PSL portfolio to 52.14 per cent (42.30 per cent as at March-end 2020) of advances and 44.34 per cent (41.13 per cent), respectively.
In fact, in FY21, Saraswat Bank purchased PSLCs (general portfolio) aggregating ₹2,452.75 crore (₹650 crore in FY20).
PSLCs enable banks to achieve PSL target and sub-targets by purchase of these instruments in the event of shortfall and at the same time incentivise the surplus banks, thereby enhancing lending to the categories under priority sector.
Gautam E. Thakur, Chairman, Saraswat Co-operative Bank, observed that the retail clients to whom the bank has extended commercial advances of less than ₹10 crore are substantial in number.
“As these retail clients grow in their respective businesses, their requirements of commensurate bank funding will also increase. Today’s retail banking client is tomorrow’s wholesale banking client.
“With increase in ticket size of the advances granted to such customers, we slowly plan to handhold these retail customers as they undergo their transition to the wholesale banking segment. The growth potential in this segment is huge,” Thakur said in the bank’s latest annual report.
Saraswat Bank’s wholesale advances portfolio came down by about ₹273 crore in FY21 to stand at around ₹12,687 crore as at March-end 2021.
“Due to pandemic impact and the strategic decision of the bank to mitigate the risk of credit concentration… the level of wholesale advances reduced marginally.
“…Also, due to Covid-19, customers were more cautious, resulting into large undrawn positions throughout the year. LCBD (letter of credit backed bill discounting) exposure too declined,” the report said.
The bank mitigated credit concentration risk by reducing exposure in large value borrowal accounts, restricting entry level exposures at a reasonable level, restricting entry into large size consortium, and restricting exposures to existing borrowal accounts by forming consortiums.
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