Banks to achieve priority sector lending target via RBI's liquidity dose

Banks can mark their select bond investments using money under a special central bank window, as priority sector lending. The move should make it viable for banks subscribing bonds of small and micro finance companies as they are mandated to expand credit in sectors like MSME, agriculture, social infrastructure.

“In order to incentivise banks’ investment in the specified securities of these entities, it has been decided that a bank can exclude the face value of such securities kept in the HTM category from computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets,” RBI said in a note clearing certain ambiguities.

The RBI also said the amount invested in the bonds of smaller NBFCs and MFIs from the TLTRO 2.0 funds would be exempt from computing as bank's adjusted net bank credit, which is the base* for calculating its obligation to lend to the priority sector. The reduced base will help banks meet their PSL targets.

“This exemption is only applicable to the funds availed under TLTRO 2.0,” RBI said.

Last Friday, the central bank announced the second version Targeted Long Term Repo Operation or TLTRO, a window where banks can borrow money at 3.75 percent only to invest in bonds issued by non-banking finance companies and micro finance lenders.

The central bank has mandated that half of the money availed through TLTRO should be invested in bond issuances in a prescribed format. Total TLTRO window is for Rs 50,000 crore.

At least 10 percent of Rs 25,000 crore should be deployed in bonds to be issued by micro finance companies. Companies with less than Rs 500 crore assets size should have 15 percent investment of the pie.

“The objective is to ease any liquidity stress and/or impediments to market access that these small and mid-sized entities might be facing,” the central bank said.