>RBI's draft PSL guidelines - negative for asset financiers. 22 February 2012

RBI today released the draft guidelines on re-classification and updates for priority sector lending (PSL) and related issues under the chairmanship of Mr. M. V. Nair. While most of the original PSL guidelines remain unchanged, a sub-target of 9% of Adjusted Net Banking Credit (ANBC) for small and marginal farmers (SFMF) within agriculture and allied activities has been recommended (negative for private banks). At the same time, the distinction between direct and indirect agriculture has been done away with (positive for banks in general and private banks in particular). RBI has also revised the guidelines for on-lending to/securitisation by NBFCs, which we believe could be negative for MMFS and SHTF.


■ No major impact on listed banks: PSL has been increased for foreign banks to 40% of ANBC (from 32%), in line with public and private banks. The sub-target of 10% for exports and 15% each for agriculture and MSE has been recommended as PSL for foreign banks. A sub-category of weaker and marginal farmers has been introduced, which should be 9% of the total ANBC and can be negative for private banks given their lower rural reach. However, the RBI has also done away with the distinction between direct and indirect agriculture for the 18% PSL target requirement (4% + 14% earlier), which we believe is positive for private banks.


■ Guidelines for asset financiers like SHTF and MMFS: The draft recommends that NBFCs should maintain a minimum threshold requirement of 65% of their total Assets Under Management (AUM) on their balance sheets (of the last financial year), as also on an average throughout the financial year. However, pre-existing assets on book may be excluded for the purpose of priority sector classification. Moreover, spreads for asset financing companies under on-lending, securitisation and buyouts under direct assignments have been capped at 6% and for HFCs at 3.5%.


■ Impact on asset financiers like SHTF and MMFS, and HFCs: Shriram Transport Finance (SHTF): As on 31 Dec’11, securitised assets comprised 39.6% of the company’s AUM. On an incremental basis, given that 65% of AUM will have to be held on the balance sheet, securitisation levels should likely come down at the margin. However, as per the draft guidelines on-lending to SHTF would also be eligible for PSL classification, though, we also believe that overall loan portfolio eligible for PSL classification could be lower than 35% due to interest spread cap of 6% put up by RBI (spread on securitisation is significantly higher than 6%). Moreover, we note that a cap on spreads at 6% of securitised assets could be a negative, as we estimate the securitised portfolio spreads at 10%+ since spreads on old CV portfolio are higher (as of 31 Dec’11, old CV constituted 76% of AUM). Mahindra and Mahindra Financial Services (MMFS): As on 31 Dec’11, MMFS’ securitised portfolio would have comprised ~10% of its total AUM. As per our interaction with the management, the securitisation portfolio primarily comprises tractors, for which spreads would have been significantly higher than 6%; these could come under pressure if the draft guidelines were to be implemented. Housing Financiers: We do not foresee much impact on housing financiers as we estimate their spreads on the mortgage book to be lower than that the stipulated 3.5% as per the draft guidelines.


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