RBI last week released guidelines for priority sector lending certificates (PSLC), whereby banks can buy and sell such credits to manage their priority sector lending requirements.

The move would benefit banks with significant gaps in meeting their priority sector loan requirements, including Bank of India, Bank of Baroda and IDBI Bank, it said, adding lending exposures will likely be streamlined to core segments, improving operating efficiencies.

At present, banks have to lend 40 percent of their total loans to priority sectors of agriculture, micro credits, education and social housing to promote financial inclusion particularly in rural areas.

This, Moody's said, meant that all banks had to have a priority sector focus, regardless of whether it fits their overall competitive strengths.

"Banks that did not meet this threshold were required to place deposits with the Rural Infrastructure Development Fund, which has comparatively lower yields and thus serves as a key disincentive for banks to fall below their priority sector lending targets," it said.

Also, there is no transfer of assets associated with the sale of the certificates. "Thus, the underlying credit risk and the funding requirements continue to be retained by the originating entity," it said.

This, it said, should make transactions in priority sector lending certificates very straightforward because there would be little due diligence required.

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