Financials | 3 March 2015
Sector Update | Sector Update
Financials
New PSL: Some tightening and some relaxation
Meeting sub-targets could be a challenge
Please refer to our report
on Gyan Sangam
dated Jan 5, 2015
Revised Priority Sector Lending guidelines widen the overall scope of PSL lending for
Indian Banks. However, we believe meeting sub-targets on small/marginal farmers
and micro-enterprises and quarterly monitoring of PSL norms would be a challenge.
Over last few years most banks have fulfilled overall PSL targets however, defaulted
on sub targets especially direct agri and weaker section. Non fulfillment of sub targets
led to higher devolvement of RIDF bonds and in turn impacted profitability.
Addition of new segments like medium enterprises, agri infrastructure, processing,
renewable energy would result in banks meeting PSL requirements in an oraganic
manner. Additionally, these relatively lower risk segments would improve risk-
adjusted PSL yields of banking sector and lower deployment in RIDF.
Introduction of PSL certificates would enable banks to specialize in certain segments of
priority sector and leverage on their comparative advantage.
Agri sub-limits redefined; Medium enterprises now under PSL norms
Internal Working Group (IWG) has recommended continuation of PSL target at
40% of ANBC for domestic banks; however, the same for foreign banks has been
increased to 40% vs. 32% earlier.
Considering that even the PSU Banks, with their wider reach, have not been able
to meet direct agriculture target (13.5% of ANBC) on a sustainable basis, IWG
has recommended doing away with sub-limits for direct/indirect agriculture
credit. In lieu of that, banks would have to achieve sub-target of 8% towards
Small and Marginal farmers (in a phased manner).
IWG has also recommended inclusion of new segments like medium enterprises
(with credit limit of up to INR100m), Agriculture infrastructure & processing
(without any cap), renewable energy (loans of upto INR100m for solar power,
biomass, wind mills and micro-hydel power generation).
Home loans of INR2.8m (earlier INR2.5m) in Metros and INR2m (INR1.5m) in
other locations (accounting for ~80% of housing loans in India) would also now
qualify towards meeting priority sector requirements. However, if used for PSL,
utilizing the same to raise Infra bonds will not be allowed.
Innovation through Priority Sector Lending Certificates (PSLC) – a positive
Considering that direct credit origination may not be the most efficient method
of credit delivery as it does not leverage the strengths of different banks in their
respective areas of specialization, IWG has proposed the concept of PSL
certificates enabling banks to buy them from other banking participants (for a
premium/fees).
While the PSLCs will be sold, the loans would continue to be on the books of the
original lender. The deficient bank would only be buying a right to undershoot
its priority sector-lending requirement by the amount of the certificate. If the
loans default, for example, no loss would be borne by the certificate buyer.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Vallabh Kulkarni
(Vallabh.Kulkarni@MotilalOswal.com); +91 22 3982 5430
3 March 2015
Investors are advised to refer through disclosures made at the end of the Research Report.
1
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Financials | Sector Update
We believe the merit of this concept is that it would allow the most efficient
lender to provide access to the poor, while finding a way for other banks to
fulfill their norms at lower cost.
At this stage, issuance/trading of PSLCs would be limited to banking participants.
However, NBFCs would be a key beneficiary if they are allowed to issues
certificates in future.
PSL to track changing priority of economy | Higher risk adjusted returns
In our view, addition of new categories will make it relatively easier for Banks to
fulfill PSL targets. Further committee has recommended review/revisit after
every three quarters based on the priority support requirement in the economy
which is key positive in our view.
Addition of relatively lower risk segments (medium enterprises, Agriculture
infrastructure and renewable energy) would improve risk-adjusted PSL yields of
the banking sector led by better quality assets and lower deployment in RIDF.
Additionally, with the revised norms making it easier for banks to meet PSL
requirements, we believe the overall demand and spreads of the securitization
transactions may come under some pressure if RBI accepts the
recommendations in its current form.
Quarterly monitoring of PSL, sub-target for small and marginal farmers, micro
and small enterprise loans and continued high target for weaker section will be
a drag for banks.
Exhibit 2: State-owned banks – one-year forward PBV
LPA (x)
3.2
2.3
1.8
1.3
0.8
PSU Banks Sector PB (x)
1.9
1.1
1.0
0.5
LPA (x)
Exhibit 1: Private banks – one-year forward PBV
4.5
3.5
2.5
1.5
0.5
1.0
2.4
Pvt Banks Sector PB (x)
3.8
0.3
Source: MOSL, Company
Source: MOSL, Company
3 March 2015
2

Financials | Sector Update
Exhibit 3: Synopsis of the working group recommendations on Priority Sector Lending
Source: MOSL, RBI
IWG has recommended no
change in overall PSL target
of 40% of ANBC
Exhibit 4: Key change in priority sector lending norms
% of ANBC or CEOBE
Overall PSL
Agriculture
Direct Agriculture
Small/Marginal farmers
Weaker sections
Export credit
Medium Enterprises
* 2014 data includes RIDF balances
Revised Guidelines
40
18
-
8
10
2 (limit)
7.5
Old guidelines
40
18
13.5
-
10
-
-
Source: MOSL, RBI
Including RIDF balances,
Private Banking sector
complied with the priority
sector requirements in 2014
Exhibit 5: Outstanding Credit to Priority Sector (% of ANBC)
50
45
40
35
30
PSU Banks
Private Banks
Foreign Banks
* 2014 data includes RIDF balances
Source: MOSL, RBI
3 March 2015
3

Financials | Sector Update
Committee has redefined
agriculture lending into (a)
Farm credit (b) Agriculture
(c) Ancillary activities.
Exhibit 6: Total Agriculture Credit-Domestic Banks (% of ANBC)
20
15
10
5
PSU Banks
Private Banks
Inclusion of new segments
will give banks flexibility to
meet PSL norms
0
* 2014 data includes RIDF balances
Source: MOSL, RBI
Even the PSU Banks with a
larger reach in rural areas
were not able to achieve
the 13.5% target for direct
agri on a sustainable basis
since 2001.
Exhibit 7: Direct Agriculture Credit-Domestic Banks (% of ANBC)
15
10
5
0
PSU Banks
Private Banks
Source: MOSL, RBI
Report recommends doing
away with Direct/Indirect
agriculture lending sub-
limits
Exhibit 8: Indirect Agriculture Credit-Domestic Banks (% of ANBC)
10
PSU Banks
Private Banks
5
0
Source: MOSL, RBI
3 March 2015
4

Financials | Sector Update
Exhibit 9: Credit to Weaker Sections under priority sector (% of ANBC)
PSU Banks
10
Private Banks
No change in
recommendation for
Weaker sections.
5
0
Source: MOSL, RBI
Exhibit 10: Directed Lending Programmes – An International Perspective
Country
Sectors/activities under focus
Small businesses, students/education,
Low income groups in rural areas/for creation of
electricity, waste disposal
US
Low income groups, elderly and handicapped/housing
(involves credit guarantee in lending to some of these
sectors)
Micro enterprises,
EU (Denmark and Ireland) Small and Medium Enterprises
(involves sectoral targets, credit guarantee)
Industry including SME sector/long-term investment
credit,
Rural housing,
Brazil
Agriculture,
Micro credit (involves credit guarantee, interest subsidy
and sectoral targets for some of these sectors)
Agriculture,
Micro and Small Enterprises
People’s Republic of China
(involves sectoral growth targets, credit guarantee,
interest rate subsidy)
Agriculture,
Pakistan
Exports
(involves indicative targets and interest rate subsidy)
Agriculture and agro-based industries,
Russian Federation
Rural infrastructure
(involves interest subsidies)
Agriculture
Philippines
(involves credit guarantee)
Agriculture, Micro and small enterprises, Education,
India
Housing,
Socio-economically weaker sections
Implementing agency
US Government Departments (either
independently, or in collaboration with
private investment companies)
Private banking institutions
Public banking institutions (either directly
or through local commercial banks)
Public banking institutions
Public and private banking institutions
Public banking institutions
Public and private banking
institutions/cooperatives
Public and private banking institutions
Source: MOSL, RBI
3 March 2015
5

Financials | Sector Update
Exhibit 11: Priority Sector Lending – Activity wise limits
Activity/purpose
Loans against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not
exceeding 12 months
Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-
operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry,
poultry, bee-keeping, etc.
Loans to cooperative societies of farmers for disposing of the produce of members
Loans for transportation and marketing of agriculture produce
Loans to MSEs (service enterprises)
Loans to MEs (service enterprises)
Education loans
Housing loans to individuals in metropolitan centres
Housing loans- other centres
Weaker sections- Individual women beneficiaries
Weaker sections- Artisans, village and cottage industries
Social infrastructure
Renewable Energy-Households
Renewable Energy-Other than households
Loan limit
(INRm)
5
20
50
50
50
100
1
2.8
2
0.1
0.1
50
0.5
100
Source: RBI, MOSL
Exhibit 12: Priority Sector Lending – Activity wise limits
Farm Credit
A) Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of
individual farmers, provided banks maintain disaggregated data of such loans], directly engaged in
Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.
This will include: (i) Short-term crop loans to farmers which will include traditional/non-traditional
plantations, horticulture and allied activities. (ii) Loans to farmers under Kisan Credit Card Scheme. (iii)
Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and
transporting of farm produce. (iv) Loans up to INR5m against pledge/hypothecation of agricultural produce
(including warehouse receipts) for a period not exceeding 12 months. (v) Loans to distressed farmers
indebted to non-institutional lenders. (vi) Medium & long-term loans to farmers for agriculture and allied
activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other
developmental activities undertaken in the farm, and development loans for allied activities.) (vii) Loans to
small and marginal farmers for purchase of land for agricultural purposes.
B) Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-
operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal
husbandry, poultry, bee-keeping up to an aggregate limit of INR20m per borrower.
Agriculture
infrastructure
i) Loans for construction and running of storage facilities (warehouse, market yards, godowns and silos),
including cold storage units/ cold chains designed to store agriculture produce/products, irrespective of their
location. ii) Loans for research and development in agriculture/rural sector targeted at enhancing the farm
productivity. iii) Soil conservation and watershed development, etc.
(i) Loans up to INR50m to cooperative societies of farmers for disposing of the produce of members. (ii) Loans
up to INR50m for transportation and marketing of agriculture produce. (iii) Loans for setting up of Agriclinics
and Agribusiness Centres. (iv) Loans for Agri-processing and ginning etc. (v) Loans to PACS/RRBs/MFIs for on-
lending to farmers for agricultural and allied activities.
Source: RBI, MOSL
Ancillary
activities/on-
lending
3 March 2015
6

Financials | Sector Update
Exhibit 13: Mechanism of Priority Sector Lending Certificates
Market consists of all banks who could be either issuers or buyers.
All market participants would register on an automated anonymous order matching platform where PSLCs would be bought and sold and
further traded.
Issuer (A) assumes that he will have a surplus of INR1,000m in his PSL-Agri achievement which is within 50 % of last year’s PSL achievement
and issues a PSLC for INR1,000m with a specific maturity date and posts it on the platfo
Issuer A sells the PSLC to buyer B at INR100m and credits P&L with INR10 0m. Buyer B debits P&L for INR100m.
A will subtract the value of the PSLCs issued, (in this case INR1,000m) from its PSL achievement and report accordingly to RBI on reporting date
B can claim INR1,000m worth of fulfilment of PSL obligation in case he holds the PSLC on the reporting date.
B finds he has no shortfall and therefore trades /sells on the platform to Buyer C after 80 days at INR120m. B credits P&L and C debits P&L for
INR120m.
A finds he has over estimated his PSL achievement and he has a INR500m shortfall in PSLC obligation by virtue of having to subtract this INR
1,000m – he purchases INR500m worth of PSLC from Issuer D for INR70m and adds INR500m to his PSLC achievement.
On the day of reporting to RBI,
A has subtracted INR1,000m (PSLCs issued) but then added INR500m ( PSLCs purchased) to his PSL achievement.
B can no longer claim any PSLC benefit.
C adds INR1,000m (PSLC purchased) to his PSL achievement.
D subtracts INR500m (PSLC issued) from his PSL achievement.
Source: RBI, MOSL
3 March 2015
7

Financials | Sector Update
Exhibit 14: Financials: Valuation metricess
61.85
Rating
ICICIBC*
HDFCB
AXSB
KMB*
YES
IIB
VYSB
FB
JKBK
SIB
Private Aggregate
SBIN (cons)*
PNB
BOI
BOB
UNBK
INBK
CRPBK
ANDB
IDBI
DBNK
Public Aggregate
HDFC*
LICHF
IHFL
IDFC
RECL
POWF
SHTF
MMFS
BAF
NBFC Aggregate
Buy
Buy
Buy
Neutral
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Buy
Neutral
Neutral
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
CMP
(INR)
348
1,082
633
1,409
879
936
999
151
115
28
303
169
240
188
174
178
63
87
82
56
1,364
492
631
184
359
306
1,238
262
4,318
Mcap
(USDb)
32.5
43.5
24.0
17.5
5.9
8.0
3.0
2.1
0.9
0.6
138.1
36.5
5.0
2.5
1.3
1.8
1.3
0.2
0.8
2.1
0.5
52.0
34.4
4.0
3.7
4.7
5.7
6.5
4.5
2.4
3.5
69.5
EPS (INR)
FY16
23.0
51.3
36.7
49.2
60.4
43.2
40.8
12.9
13.6
3.7
29.3
27.8
56.5
25.2
37.3
29.4
16.5
17.9
14.4
13.6
38
32
64
13
66
55
78
17
219
FY17
27.1
62.5
42.4
60.4
76.2
53.2
52.1
15.1
18.1
4.7
36.5
37.5
72.1
30.5
49.0
33.5
21.9
22.5
19.7
16.8
46
39
79
14
75
63
92
21
267
P/E (x)
FY16
12.3
21.1
17.2
28.6
14.6
21.7
24.5
11.7
8.4
7.5
19.0
9.9
6.1
4.2
7.5
4.7
6.0
3.8
4.9
5.7
4.1
8.1
25.3
15.2
9.8
14.6
5.4
5.5
15.9
15.2
19.7
16.1
FY17
10.1
17.3
14.9
23.3
11.5
17.6
19.2
10.0
6.3
5.9
15.9
7.9
4.5
3.3
6.2
3.6
5.3
2.9
3.9
4.2
3.3
6.3
19.6
12.6
8.0
12.8
4.8
4.9
13.5
12.3
16.2
13.8
BV (INR)
FY16 FY17
132 152
285 333
220 256
371 427
330 391
228 272
428 469
100 112
137 151
29
33
231
233
464
186
321
289
141
169
157
137
261
266
527
209
362
314
158
185
173
150
P/BV (x)
FY16
2.14
3.79
2.88
3.80
2.66
4.10
2.34
1.51
0.84
0.95
3.01
1.26
0.73
0.52
1.01
0.54
0.62
0.45
0.52
0.52
0.41
0.90
5.88
2.49
2.94
1.42
1.20
1.06
2.51
2.32
3.80
2.96
FY17
1.80
3.25
2.48
3.30
2.25
3.44
2.13
1.35
0.76
0.85
2.62
1.11
0.64
0.45
0.90
0.48
0.57
0.40
0.47
0.47
0.37
0.81
4.67
2.15
2.57
1.28
1.00
0.92
2.16
2.04
3.18
2.58
RoA (%)
FY16
1.90
2.03
1.76
1.86
1.70
1.98
1.04
1.19
0.81
0.78
0.78
0.78
0.51
0.72
0.58
0.64
0.54
0.55
0.58
0.48
2.53
1.41
4.23
2.20
3.50
3.18
2.27
2.56
2.94
FY17
1.91
2.03
1.69
1.86
1.73
1.97
1.11
1.16
0.95
0.86
0.85
0.91
0.55
0.75
0.66
0.63
0.64
0.60
0.69
0.51
2.53
1.42
4.29
2.19
3.36
3.11
2.44
2.76
2.88
RoE (%)
FY16
15.7
19.3
17.9
14.3
19.7
20.5
9.9
13.6
10.4
13.3
12.9
12.6
12.9
14.3
12.2
10.6
12.3
11.0
9.5
10.3
23.8
17.6
32.4
11.5
24.2
20.6
16.3
16.1
21.0
FY17
16.2
20.2
17.8
15.0
21.1
21.3
11.6
14.3
12.6
15.2
14.6
15.0
14.5
15.4
14.4
11.1
14.7
12.7
11.9
11.7
24.9
18.4
34.3
12.0
22.8
20.1
17.7
17.7
21.4
165 192
197 229
215 246
109 120
300 358
288 334
494 573
113 129
1,137 1,360
Source: Company, MOSL
3 March 2015
8

Financials | Sector Update
NOTES
3 March 2015
9

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Financials | Sector Update
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
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Motilal Oswal Securities Ltd
3 March 2015
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