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Commercial banks priority-sector lending: A strategy to give it more focus and thrust

the Reserve Bank of India today released on its website revised guidelines on Priority Sector Lending-Targets and Classification. The priority sectors are broadly taken as those sectors of the economy which, if not designated as priority sectors, may not get timely and adequate credit. Typically these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections. The revised guidelines aim at implementing the essence of recommendations of Nair Committee without dismantling the established and accepted structure of priority sector lending. The overall target under priority sector is retained at 40 percent as suggested by the Nair Committee. The targets under both direct and indirect agriculture are retained at 13.5 percent and 4.5 percent respectively while refocusing the direct agricultural lending to individuals, Self Help Groups (SHGs) and Joint Liability Groups (JLGs) directly by banks. The focus of the revised guidelines is also on direct lending by banks and not through intermediaries like Non Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs). The highlights of the revised priority sector guidelines are: Overall target under priority sector is retained at 40 per cent as suggested by Nair Committee.

The targets for both direct and indirect agricultural lending are kept unchanged at 13.5 per cent and 4.5 per cent of Adjusted Net Bank Credit, respectively.
The following important activities, among others, form part of priority sector lending as per the revised guidelines:

Foreign banks having 20 or more branches in the country will be brought on par with domestic banks for priority sector targets in a phased manner over a maximum period of 5 years starting April 1, 2013. They will be required to submit an action plan for achieving the targets over a specific time frame to be approved by RBI.

Loans to Micro and Small Service enterprises up-to `1 crore and all loans to Micro and Small manufacturing enterprises Loans upto `25 lakh for housing in metropolitan centres of population above `10 lakh and `15 lakh at other centres. Loans to Food and Agro processing units. Loans to individuals for educational purposes including for vocational courses upto `10 lakh
in India and `20 lakh abroad.

Loans for housing projects exclusively for economically weaker sections and low income groups, provided the cost does not exceed `5 lakh per dwelling unit. Loans to distressed farmers indebted to non institutional lenders. Overdrafts upto `50000/- in No-Frills account. Loans to State Sponsored Organisations for scheduled castes and scheduled tribes. Loans to individuals for setting up of off-grid solar and other off-grid renewable energy solutions for households. Loans to individuals other than farmers upto `50000/- to prepay their debt to noninstitutional lenders.

The foreign banks with less than 20 branches will have no sub targets within the overall priority sector lending target of 32 per cent. This is expected to allow them to lend as per their core competence to any priority sector category. Bank loans to Primary Agricultural Credit Societies (PACS), Farmers Service Societies (FSS) & Large Adivasi Multi-Purpose Co-operative Societies (LAMPS) ceded to or managed/controlled by such banks for on-lending to farmers for agricultural and allied activities are included under direct agriculture.

Investments by banks in securitised assets, outright purchases of loans and assignments to be eligible for classification under priority sector provided the underlying assets qualify for priority sector treatment and the interest rate charged to the ultimate borrower by the originating entity does not exceed Base Rate of such bank plus 8 per cent per annum. Background

It may be recalled that as proposed in Para 94 of Monetary Policy Statement 201112, a Committee (Chairman: Shri M.V. Nair) was set up in August 2011 to re-examine the existing classification & suggest revised guidelines with regard to Priority Sector Lending Classification and related issues. The Committee submitted its report in February 2012 which was placed in public domain for comments. The recommendations of the Committee have been examined based on interface with and comments received from various stakeholders. The Committee has stated that the robust reporting system with granularity and system generation of priority sector data is of utmost importance for proper monitoring and appropriate policy making. The Reserve Bank of India is seized of the issue and separate guidelines will be issued in due course
http://www.anirudhsethireport.com/rbi-revised-guidelines-on-priority-sector-lending-targets-andclassification/ http://www.elin-prosjektet.com/priority-sector-lending-by-commercial-banks/
A Review of Priority Sector Lending by Commercial Banks in India Introduction To The Study Availability of cheap and adequate credit is a boon for the Economic Development of a country. By providing credit to farmers, industries, traders and businessmen the economic progress can be achieved. The banking system can influence economic growth by enhancing resources in the direction of national objectives and priorities. The banks play a very crucial role in the process of economic development and so the availability of banking infrastructure is considered as one of the prerequisites for rapid and balanced development of the country. The banks in India have an important responsibility of chanalizing the funds with most important sectors to fulfill the predetermined objectives. There is a rapid expansion in banking, deposit mobilization and credit development due to which there is change in the scope of banking operations. Lending To Priority Sectors By Commercial Banks The concept of priority sector was evolved in the late sixties in order to focus attention on the need to ensure adequate credit facilities to certain neglected sectors of the economy particularly in the rural areas. The involvement of banks in priority sector lending has grown considerably with special emphasis on opening branches in un-banked areas. With a view to ensure flow of credit to the neglected sectors like agriculture and small scale industries, the concept of priority sector lending was evolved and commercial banks were advised to grant at least 40 percent of their total advances to priority sector comprising of agriculture, small scale industries, small road and transport operators, retail trade, small business, professional and self employed persons, education which stood at 14 percent of the total

advances in 1969, increased to 46 percent as at the end of 1988. And the percentage of advances to priority sector was 35 during 1997. Side by side with the expansion of bank deposits, there has been continued expansion of bank credit reflecting the rapid expansion of industrial and agricultural output. The banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before, just as bank deposits have expanded, bank credit too has expanded tremendously particularly since July 1969, from about Rs.4,700 crorers in 1970-71 to Rs.7,25,370 crorers during 2002-2003. In recent years, bank credit has picked up smartly by around 20 to 21 percent per year and many factors have contributed to this: 1. Increase in credit facilities by commercial banks results in large reduction in reserve requirements (CRR/SLR);

2. Release of impounded cash balances under incremental cash reserve ration (ICRR); 3.Sharp increase in food credit mainly due to increased food procurement operation; 4.Increased demand for credit from public undertakings and the large increase in export credit; and 5.Fall in the interest due to RBIs cheap money policy rapid expansion in bank lending for industry, for housing, for buying of cars etc,. In the sphere of bank credit, however, some of the old abuses regarding bank lending are still to be met with. For instance, bank credit is freely available to well established houses of industry and trade without much difficulty while the tiny and small businessmen really find it difficult to get credit from banks; even now, some powerful but unscrupulous speculators are able to use bank funds to corner shares and acquire control over companies. Before 1969 commercial banks had largely neglected agriculture on the ground that rural credit was to be undertaken by cooperative credit societies and banks. Accordingly, they remained largely indifferent to the credit needs of framers for agricultural operations and for land improvement. This was regarded as a basic reason for the failure of planning in the agricultural sector and consequently for the failure of general planning. At the same time, as the banks were owned and controlled by big industrialists before nationalization, small industrial concerns and business units were ignored by banks. Soon after nationalization, the commercial banks were asked to be specially concerned with the financing of priority sector of agriculture, small scale industry and business and small transport operators, In course of time, other priority sectors were also added, such as retail trade, professional and self-employed persons, education, housing loans for weaker sections and consumption loans. The rationale of priority sector lending was one of the causes for nationalization of the top 14 banks in 1969. However, it was the Working Group on the Priority Sector Lending and the 20 Point Economic Programme chaired by Dr.K.S.Krishnaswami which clearly spelt out the concept: The concept of Priority Sector Lending is mainly intended to ensure that assistance from banking system should flows in an increasing manner to those sectors of the economy which though accounting for a significant proportion of the national product have not received adequate support of institutional finance in the past. The different segments of the priority sector are as follows: 1. Agriculture 2. 3. 4. 5. 6. 7. 8. Small Scale Industries Small Road and Water Transport Operators Retail Trade Small Business Professional and Self-employed persons Education Housing Finance

The Reserve Bank of India issued certain directives to the commercial banks regarding Priority Sector Lending. Priority Sector Advances should constitute 40 percent of aggregate bank credit. Out of priority sector advances at least 40 percent should be allocated to agriculture. Direct advances to the weaker sections in agriculture and allied activities in rural area should form at least 50 percent of the total direct lending to agriculture. Bank credit to rural artisans village and cottage industries should at least be 12.5 percent of the total advances to small-scale industries. About 12 percent of bank credit should go to exporters. The commercial banking system and particularly the public sector banks under the influence of the finance ministry and the ruling party politicians took to priority lending enthusiastically. The total credit extended by the public sector banks to agriculture, small-scale industry and other priority sectors went up from Rs.440 crores in June, 1969 to Rs.1.71,190 crores in March 2002. As a result, advances to priority sectors as percentage of total credit increased from 15 percent in June 1969 to 43 percent in March 2002. The rate of progress was quite rapid soon after nationalization but later progress was more modest. The relatively slow progress of advances to the priority sectors was due to the fact that the bank officials from top to bottom were not imbued with the new objectives of banking. At the same time banks were also worried at the poor and unsatisfactory recovery performance of the agricultural and small sectors.

Priority Sector Lending

The Government of India through the instrument of Reserve Bank of India (RBI) mandates certain type of lending on the Banks operating in India irrespective of their origin. RBI sets targets in terms of percentage (of total money lent by the Banks) to be lent to certain sectors, which in RBI's perception would not have had access to organised lending market or could not afford to pay the interest at the commercial rate. This type of lending is called Priority Sector Lending. Financing of Small Scale Industry, Small business, Agricultural Activities and Export activities fall under this category. This is also called directed credit in Indian Banking system.

Financing Priority Sector in the economy is not strictly on commercial basis as not only the general approach is liberal but also the rate of interest charged on such loans is less. Export finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian corporates. Part of the cost of this concession is borne by RBI by means of refinancing such loans at concessional rate. Indian Banks, therefore, contribute towards economic development of the country by subsidizing the business activities undertaken by entrepreneurs in the areas which are consider "priority sector" by RBI. http://www.banknetindia.com/banking/psl.htm http://www.thehindu.com/business/Economy/article2917025.ece

RBI panel increases priority sector lending target for foreign banks

The Reserve Bank of India (RBI) panel on priority sector lending on Tuesday proposed that the target (priority sector) for foreign banks may be increased to 40 per cent of net bank credit from the current level of 32 per cent with subtargets of 15 per cent for exports and 15 per cent for the MSE sector, within which 7 per cent may be earmarked for micro enterprises. The target of domestic scheduled commercial banks for lending to the priority sector may be retained at 40 per cent of net bank credit. The committee, under the chairmanship of M. V. Nair, Chairman, Union Bank of India, has re-examined the existing classification and suggested revised guidelines with regard to priority sector lending and related issues. The committee suggested that the sector agriculture and allied activities' may be a composite sector within the priority sector, by doing away with the distinction between direct and indirect agriculture. However, the targets for agriculture and allied activities would be at 18 per cent. . A sub-target for small and marginal farmers within agriculture and allied activities is recommended, equivalent to 9 per cent, which would be achieved in stages by 2015-16. The MSE sector may continue to be under the priority sector. Within the MSE sector, a sub-target for micro enterprises is recommended, equivalent to 7 per cent, which would also be achieved in stages by 2013-14. The loans to housing and education may continue to be under the priority sector. Loans for construction or purchase of one dwelling unit per individual up to Rs.25 lakh; loans up to Rs.2 lakh in rural and semi urban areas and up to Rs.5 lakh in other centres for repair of damaged dwelling units may be granted under the priority sector. To encourage construction of dwelling units for economically weaker sections and low income groups, housing loans granted to these individuals may be included in the weaker sections category. All loans to women under the priority sector may also be counted under loans to weaker sections. The limit under the priority sector for loans for studies in India may be increased to Rs.15 lakh and

Rs.25 lakh in case of studies abroad, from the existing limit of Rs.10 lakh and Rs.20 lakh, respectively. The committee recommended allowing non-tradable priority sector lending certificates on a pilot basis with domestic scheduled commercial banks, foreign banks and regional rural banks as market players.
http://www.business-standard.com/india/news/priority-sector-credit-rules-for-large-foreign-bankstoo/481016/ Five-year schedule called for; other Nair panel recommendations on lending rules for domestic entities broadly accepted Foreign banks in India and having more than 20 branches are to be treated on a par with domestic banks in priority sector lending. According to the latest norms, issued today by the Reserve Bank of India (RBI), these banks must extend 40 per cent of their net credit to the priority sector, a norm hitherto applicable only for domestic banks. Only four foreign banks have more than 20 branches Standard Chartered, HSBC, Citibank and Royal Bank of Scotland (RBS).