RBI exempts loans against new NRI deposits from PSL norms

The Reserve Bank of India (RBI) on Friday announced that loans extended against fresh FCNR(B) and NRE deposits will no longer count towards a bank's priority sector lending (PSL) obligations. The decision, which takes immediate effect, is expected to give lenders more room to deploy funds without the burden of meeting PSL targets on such exposures.

What the exemption means for banks

Under current rules, banks must channel a specified portion of their adjusted net bank credit into sectors like agriculture, small-scale industry, and education. Loans backed by foreign currency non-resident (bank) and non-resident external deposits were earlier treated as part of this calculation. With the latest exemption, banks can now lend against these deposits without worrying about skewing their PSL compliance.

The move is a targeted relief for lenders who have been cautious about accepting fresh NRI deposits due to the PSL implications. Industry watchers say it effectively lowers the cost of holding such deposits, making them more attractive for banks to mobilise.

A nudge for NRI inflows

The RBI's decision comes amid a broader effort to shore up foreign currency resources. By easing the PSL burden, the central bank is signalling that it wants banks to actively court NRI funds — particularly in a global environment where dollar liquidity can be volatile.

Bankers have welcomed the step, noting that it simplifies balance-sheet management. One senior public sector banker, speaking on condition of anonymity, said the exemption would "encourage more aggressive pricing" on NRI deposit products, which could in turn boost remittances into the country.

Basel rule changes on the horizon

In a related development, the RBI has also floated proposals to tweak the country's Basel III implementation norms. While details remain sketchy, the suggestion hints at a possible recalibration of capital requirements for banks, especially those with significant overseas operations or derivatives exposure.

Analysts interpret this as a preparatory step ahead of the next round of global banking standards. The RBI has not yet specified a timeline for finalising these changes, but market participants expect a draft circular in the coming months.

What stays unchanged

It is worth noting that the PSL exemption applies only to loans against new FCNR(B) and NRE deposits, not existing ones. Banks with a large book of outstanding NRI-linked loans will need to continue monitoring their classification until those deposits mature.

Also, the exemption does not alter the overall PSL target of 40 per cent of adjusted net bank credit. It simply excludes a specific category of lending from the denominator, freeing up headroom for other qualifying assets.

Immediate impact and market response

Shares of most banking stocks traded higher on Friday afternoon following the announcement, though the gains were modest. The RBI's move is seen as part of a series of measures this year aimed at reducing compliance friction for lenders while maintaining credit discipline.

For depositors, there is no direct change to interest rates or tenures. However, if banks compete harder for NRI funds, customers could see marginally better rates on FCNR(B) and NRE accounts in the near term.

The central bank's next monetary policy review is slated for October, where further clarifications on the Basel proposals may emerge. Until then, lenders will watch how the exemption plays out in their quarterly PSL reporting.