Agents,  MFIs Key To Expanding Priority Sector Lending To Low Credit Districts
A Hindusthan Microfinance Pvt. Ltd. employee interviews loan applicants in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

Agents, MFIs Key To Expanding Priority Sector Lending To Low Credit Districts

Banks will need to tap into their agent network and leverage existing partnerships with non-bank lenders to target potential borrowers in districts with low credit penetration.

Last week, the Reserve Bank of India revised its guidelines for priority sector lending and brought in differential weights for areas where the per capita priority sector lending is low. 184 districts were identified by the central bank as areas where PSL credit deployment has been low and assigned loans to these districts a higher weight in calculating a bank’s priority sector lending. The majority of these districts are in the northeast followed by Uttar Pradesh, Jharkhand, Chhattisgarh and Bihar.

To address regional disparities in the flow of priority sector credit at the district level, it has been decided to rank districts on the basis of per capita credit flow to priority sector and build an incentive framework for districts with comparatively lower flow of credit and a dis-incentive framework for districts with comparatively higher flow of priority sector credit.
RBI’s Revised Priority Sector Lending Guidelines

Leverage Existing Infrastructure

According to a Sept. 4 report by Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, banks achieved the overall PSL target of 40% lending in FY20, with state-owned lenders achieving 41.05% of the target, private banks 40.32% and foreign banks 40.81%, the report said.

In order to move lending towards the low credit districts, banks will need to work on improving the credit absorption in these districts, said CS Setty, managing director for SBI.

“While in recent years we have improved the reach tremendously through bank mitras (agents) or customer service points, currently most CSPs perform account opening for direct benefit transfers, cash payment and deposit services but are not used for credit delivery. However, as part of our ‘lend digital and collect physical’ strategy, we have been using their services for collections, said Setty.

The bank will explore the use of their agents for credit delivery in terms of getting new customer leads this year, he said.

The bank is examining the ways in which it can leverage its agent network and CSPs for extending micro credit and strengthen collections and also, create a co-lending and co-origination model with MFIs, who have a better collection efficiency in specific areas and districts.
CS Setty, MD, State Bank of India

The idea is to ensure that banks lend in the under-penetrated districts and now that we are given an incentive you will see a push for PSL credit towards these areas and away from districts that have high credit penetration, said a senior banker with a state-run bank on the condition of anonymity.

But the issue that remains is whether these districts can absorb more credit to allow lenders to provide loans and collect dues on time, this person said.

A second senior banker, who also spoke on condition of anonymity, said that since these districts have historically had low deposits, banks and lenders did not have an incentive to reach out and lend to customers here. We are looking at expanding our agent network in these districts and use farmer producer organisations and microfinance companies to source fresh customers, the banker, who works with a public sector bank, said.

According to a report by CRIF High Mark, banks now have a 40.1% share in the outstanding micro-credit market, MFIs have a share of 31.3% and small finance banks have a share of 18.8%.

Expanding Reach

The North Eastern states, in particular, have had lower credit penetration and the new guidelines seek to correct that. This may need lenders to spread their networks further.

While there are MFIs and even banks operating for many years in the North-East the branches were mainly based in urban areas, said an executive with a small finance bank based in the North-East. In comparison, the hill areas have less credit penetration because of the physical challenge in reaching these areas. Also the population in some of these districts is small so the credit demand has not grown much compared to other areas in the region, this person said on the condition of anonymity.

Karthik Srinivasan, group head of financial sector ratings, ICRA said the RBI thinks that there could be more potential for lending in these regions compared to what banks have been doing. “Under the new guidelines the banks would receive a benefit by lending to these districts. Banks that do not have branches in these districts may use the micro-finance and small non-bank lenders network to begin disbursing the PSL credit and grow their book,” he said.

According to MFINs’ annual report for 2019-20, across the country there are 14,275 branches and over 1.16 lakh employees, 62% of which provide door-step credit to low-income clients.

“The states where the credit has been growing the fastest are in Bihar, Jharkhand and other eastern states. Today micro-finance companies are in over 620 districts out of 739 total districts in the country, and under the new guidelines MFIs would be present in at least 125 out of the 185 districts,” said Harsh Shrivastava, former chief executive officer, MicroFinance Institutions Network.

As of March 2020, eastern and north-east states accounted for 34% of the gross micro-credit outstanding portfolio, followed by southern states at 27%, western states at 15%, northern states at 13%, and central states at 11%.

Source: Microfinance Institutions Network Annual Report 2019-20
Source: Microfinance Institutions Network Annual Report 2019-20

Shrivastava said that MFIs will now be incentivised to penetrate deeper in these districts since they’re dependent on selling priority sector loans for funds.

“Many MFIs are either directly lending or working for banks to deploy PSL credit, while it would be hard for an NBFC or bank to open a new branch in these districts, it’s relatively easier for MFIs due to their low cost of operations,” he said.

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