The regulator has directed ICICI Bank to make an additional one-time provision of Rs 1,283 crore and HDFC Bank to set aside Rs 500 crore, besides urging both lenders to address gaps in their portfolios to bring them in line with PSL norms. “In the future, we need to operate in a model that is acceptable to the regulator,” HDFC Bank chief financial officer Srinivasan Vaidyanathan said during an earnings call. “The recalibration of our book is driven by the scale of finance, to clearly classify what is genuinely an agriculture loan and what falls outside that remit.”
Regulators have been closely scrutinising banks for the over-classification of agricultural loans, particularly where borrowings are partly used for non-farm purposes. The RBI has asked banks to tighten agri loan classification by ensuring that only credit meeting genuine farm requirements-as defined by the official scale of finance-is treated as agricultural lending. Any lending beyond these thresholds is required to be reclassified or managed under non-agri categories.
Market participants said the additional provisioning reflects regulatory action rather than asset quality stress. “The RBI has asked some banks to declassify these loans as PSL, and even though there are no provisioning gaps, this is effectively a punishment in the form of additional capital set aside,” said Ashutosh Mishra, head of institutional equities research at Ashika Stock Broking. “Banks have indicated they will rectify documentation gaps and other regulatory formalities so that these loans can be reclassified as agricultural loans in the next cycle.”
In ICICI Bank’s case, the RBI identified misclassification in the agriculture portfolio amounting to Rs 20,000-25,000 crore, with some of the loans dating back to as early as 2012.
“Following its annual supervisory review, the RBI has directed the bank to make a standard asset provision in respect of a portfolio of agricultural priority sector credit facilities where the terms were found to be not fully compliant with regulatory requirements for classification as agricultural PSL,” ICICI Bank executive director Sandeep Batra said during the post-earnings media call.
The scale of finance sets out the credit required for specific crops, land sizes and regions, covering inputs such as seeds, fertilisers, labour and irrigation. Only the portion of lending within these limits qualifies as agricultural credit for PSL purposes, which carries regulatory benefits such as priority sector status and lower risk weights.
“These banks had disbursed certain loans that were classified as PSL-eligible, with some of these exposures originating as far back as 2012,” said Prakash Agarwal, partner at Gefion Capital. “The RBI has asked them to provide a 5% provision. These provisions stem from a specific regulatory directive rather than existing norms and are expected to be reversed as the loans run down or are recovered.”
A similar supervisory exercise was undertaken at Axis Bank during the June quarter last year, when the lender said the prudent application of technical parameters for recognising slippages and subsequent upgrades had impacted reported asset quality metrics. The bank had clarified at the time that the impact was largely technical in nature and confined to cash credit, overdraft products and one-time settled accounts.