RBI may give HDFC Bank more time to reach 40% priority sector lending target

The Reserve Bank of India (RBI) may give HDFC Bank more time to reach the 40 percent priority sector lending (PSL) target, banking sources tell CNBCTV18. However, any concessions on statutory liquidity ratio (SLR) and cash reserve ratio (CRR) look tough, these sources said. Banks are required to keep 4.5 percent of their net deposits as cash reserves and 18 percent in government securities. SLR is a percentage of deposits that banks have to maintain in the form of government securities, while CRR is the amount of funds that banks have to keep with the RBI.

HDFC Bank missed its PSL target in the fiscal year 2021 which was attributed to the COVID-19 pandemic's impact on the economy. The bank has been making efforts to increase its lending to priority sectors, such as agriculture, micro, small, and medium enterprises (MSMEs), and housing, sources said.

If the RBI decides to give HDFC Bank more time to achieve the PSL target, it will be following precedent. In 2002, after the merger of ICICI Limited and two of its wholly-owned subsidiaries, ICICI Personal Financial Services Limited (ICICI PFS) and ICICI Capital Services Limited (ICICI Capital) with ICICI Bank, the RBI had given ICICI Bank more time to reach the PSL target. However, ICICI Bank had to maintain more than 40 percent PSL on incremental loans, and it was not given CRR and SLR concessions.

The RBI is usually cautious about giving CRR, SLR concessions, as these are prudential buffers needed to absorb shocks in a crisis. Banking analysts say the street is expecting no concessions at all, hence the there may not be any fall in the HDFC Bank stock if it is asked to maintain CRR, SLR from day one of the merger. In fact the PSL concession news, if and when it comes will be a minor positive.