What is priority-sector lending?

Banks were assigned a special role in the economic development of the country, besides ensuring the growth of the financial sector. The banking regulator, the Reserve Bank of India, has hence prescribed that a portion of bank lending should be for developmental activities, which it calls the priority sector. . Are there minimum limits? The limits are prescribed according to the ownership pattern of banks. While for local banks, both the public and private sectors have to lend 40 % of their net bank credit, or NBC, to the priority sector as defined by RBI, foreign banks have to lend 32% of their NBC to the priority sector.

LENDING TO PRIORITY SECTOR At a meeting of the National Credit Council held in July 1968, it was emphasised that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries. The description of the priority sectors was later formalised in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines were issued in this connection indicating the scope of the items to be included under the various categories of priority sector. Although initially there was no specific target fixed in respect of priority sector lending, in

November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 per cent by March 1979. At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sectors to 40 per cent by March 1985. Subsequently, on the basis of the recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programme by Banks, all commercial banks were advised to achieve the target of priority sector lending at 40 per cent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups. On the basis of the recommendations of the Internal Working Group, set up in Reserve Bank to examine, review and recommend changes, if any, in the existing policy on priority sector lending including the segments constituting the priority sector, targets and sub-targets, etc. and the comments/suggestions received thereon from banks, financial institutions, public and the Indian Banks Association (IBA), it has been decided to include only those sectors that impact large segments of population & the weaker sections, and which are employment-intensive, as part of the priority sector.

Are there specific targets within the priority sector?

Domestic banks have to lend 18 % of NBC to agriculture and 10 % of the NBC has to be to the weaker section. However, foreign banks have to lend 10 % of NBC to the small-scale industries and 12 % of their NBC as export credit. However, for the balance, there are a vast number of sectors that banks can lend as priority sector. The Reserve Bank has a detailed note of what constitutes a priority sector, which also includes housing loans, education loans and loans to MFIs, among others. What is net bank credit? The net bank credit should tally with the figure reported in the fortnightly return submitted under Section 42 (2) of the Reserve Bank of India Act, 1934. However , outstanding deposits under the FCNR (B) and NRNR schemes are excluded from net bank credit for computation of priority sector lending target/subtargets The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below :

Domestic banks (both public sector and private sector banks) Total Priority Sector advances Total agricultural advances SSI advances Export credit No target Export credit does not form part of priority sector Advances to weaker sections 10 percent of NBC 18 percent of NBC 40 percent of NBC

Foreign banks operating in India

32 percent of NBC

No target

10 percent of NBC 12 percent of NBC

No target

The net bank credit should tally with the figure reported in the fortnightly return submitted under section 42(2) of the Reserve Bank of India Act, 1934. However, outstanding deposits under the FCNR(B) and NRNR Schemes are excluded from net bank credit for computation of priority sector lending target/ sub-targets

COMMON GUIDELINES FOR PRIORITY SECTOR ADVANCES

1 Banks should follow the following common guidelines prescribed by the Reserve Bank for all categories of advances under the priority sector.

2 PROCESSING OF APPLICATIONS.

 2.1 Completion of Application Forms In case of Government sponsored schemes such as SGSY, the concerned project authorities like DRDAs, DICs, etc. should arrange for completion of application forms received from borrowers. In other areas, the bank staff should help the borrowers for this purpose.

 2.2 Issue of Acknowledgement of Loan Applications Banks should give acknowledgement for loan applications received from weaker sections. Towards this purpose, it may be ensured that all loan application forms have perforated portion for acknowledgement to be completed and issued by the receiving branch. Each branch may affix on the main application form as well as the corresponding portion for acknowledgement, a running serial number. While using the existing stock of application forms which do not have a perforated portion for acknowledgement is separately given, care should be taken to ensure that the serial number given on the acknowledgement is also recorded on the main application. The loan applications should have a check list of documents required for guidance of the prospective borrowers.

 2.3 Disposal of Applications (i) All loan applications up to a credit limit of Rs. 25,000/- should be disposed of within a fortnight and those for over Rs. 25,000/-, within 4 weeks. (ii) All loan applications for SSI up to a credit limit of Rs. 25,000/- should be disposed of within 2 weeks and those up to Rs. 5 lakh within 4 weeks, provided the loan applications are complete in

all respects and are accompanied by a 'check list'.

 2.4 Rejection of Proposals Branch Managers may reject applications (except in respect of SC/ST) provided the cases of rejection are verified subsequently by the Divisional/Regional Managers. In the case of proposals from SC/ST, rejection should be at a level higher than that of Branch Manager.

 2.5 Register of Rejected Applications A register should be maintained at the branch, wherein the date of receipt, sanction/rejection/disbursement with reasons therefor, etc., should be recorded. The register should be made available to all inspecting agencies.

3 MODE OF DISBURSEMENT OF LOAN With a view to providing farmers wider choice as also eliminating undesirable practices, banks

may disburse all loans for agricultural purposes in cash which will facilitate dealer choice to borrowers and foster an environment of trust. However, banks may continue the practice of obtaining receipts from borrowers.

4 REPAYMENT SCHEDULE.  4.1.Repayment programme should be fixed taking into account the sustenance requirements, surplusgenerating capacity, the break-even point, the life of the asset, etc., and not in an "ad hoc" manner.

 4.2 As the repaying capacity of the people affected by natural calamities gets severely impaired dueto the damage to the economic pursuits and loss of economic assets, the benefits such as restructuring of existing loans, etc. as envisaged under our circular RPCD.CO.PLFS.NO. BC 16/05.04.02/2006-07 dated August 9, 2006 may be extended to the affected borrowers.

5 RATES OF INTEREST.

 5.1 The rates of interest on various categories of priority sector advances will be as per RBI directives issued from time to time.

 5.2 (a) In respect of direct agricultural advances, banks should not compound the interest in the case of current dues, i.e. crop loans and instalments not fallen due in respect of term loans as the agriculturists do not have any regular source of income other than sale proceeds of their crops.

(b) When crop loans or instalments under term loans become overdue, banks can add . interest to principal.

(c) Where the default is due to genuine reasons banks should extend the period of loan or reschedule the instalments under term loan. Once such a relief has been extended, the overdues become current dues and banks should not compound interest.

(d) Banks should charge interest on agricultural advances in respect of long duration crops, at annual rests instead of quarterly or longer rests, and could compound the interest, if the loan/instalment becomes overdue.

6 PENAL INTEREST.  6.1-The issue of charging penal interests that should be levied for reasons such as default in repayment, non-submission of financial statements, etc. has been left to the Board of each bank. Banks have been advised to formulate policy for charging such penal interest with the approval of their Boards, to be governed by well accepted principles of transparency, fairness, incentive to service the debt and due regard to difficulties of customers.

 6.2- No penal interest should be charged by banks for loans under priority sector up to Rs 25,000 as hitherto. However, banks will be free to levy penal interest for loans exceeding Rs 25,000, in terms of the above guidelines.

7. SERVICE CHARGES / INSPECTION CHARGES.

7.1- No service charges/inspection charges should be levied on priority sector loans up to Rs. 25,000/-. 7.2- For loans above Rs. 25,000/- banks will be free to prescribe service charges with the prior approval of their Boards, in terms of circular No. DBOD.Dir.BC.86/03.01.00/99-2000 dated September 7, 1999.

8. INSURANCE AGAINST FIRE AND OTHER RISKS

8.1- Banks may waive insurance of assets financed by bank credit in the following cases:

No. Category Type of Risk Type of Assets

(a)- All categories of priority sector advances up to and inclusive of Rs. 10,000/Fire & other risks Equipment and current assets. Advances to SSI sector up to and inclusive of Rs. 25,000/- by way of

Composite loans to artisans, village and cottage industries. Fire Equipment and current assets All term loans Fire Equipment.

(b) Working capital where these are against non-hazardous goods Fire Current Assets.

8.2 Where, however, insurance of vehicle or machinery or other equipment/assets is compulsory under the provisions of any law or where such a requirement is stipulated in the refinance scheme of any refinancing agency or as part of a Government-sponsored programmes such as SGSY, insurance should not be waived even if the relative credit facility does not exceed Rs. 10,000/- or Rs. 25,000/-, as the case may be.

9. PHOTOGRAPHS OF BORROWERS.

While there is no objection to taking photographs of the borrowers for purposes of identification, banks themselves should make arrangements for the photographs and also bear the cost of photographs of borrowers falling in the category of Weaker Sections. It should also be ensured that the procedure does not involve any delay in loan disbursement.

10 DISCRETIONARY POWERS.

All Branch Managers of banks should be vested with discretionary powers to sanction proposals from weaker sections without reference to any higher authority. If there are difficulties in extending such discretionary powers to all the Branch Managers, such powers should exist at least at the district level and arrangements be ensured that credit proposals on weaker sections are cleared promptly 11 MACHINERY TO LOOK INTO COMPLAINTS.

There should be machinery at the regional offices to entertain complaints from the borrowers if the branches do not follow these guidelines, and to verify periodically that these guidelines are scrupulously implemented by the branches.

12 AMENDMENTS.

These guidelines are subject to any instructions that may be issued by the RBI from time to time.

I.

CATEGORIES OF PRIORITY SECTOR.

The broad categories of priority sector for all scheduled commercial banks are as under:

(i)

Agriculture (Direct and Indirect finance):

Direct finance to agriculture shall include short,medium and long term loans given for agriculture and allied activities directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers without limit and to others (such as corporates, partnership firms and institutions) up to Rs.20 lakh, for taking up agriculture/allied activities.

Indirect finance to agriculture shall include loans given for agriculture and allied activities as specified in Section I, appended.

(ii)

Small Scale Industries (Direct and Indirect Finance):

Direct finance to small scale industries (SSI) shall include all loans given to SSI units which are engaged inmanufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) excluding land and building does not exceed the amounts specified in Section I, appended. Indirect finance to SSI shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector.

(iii)

Small Business / Service Enterprises:

Shall include small business, retail trade,professional & self employed persons, small road & water transport operators and otherservice enterprises as per the definition given in Section I and other enterprises that areengaged in providing or rendering of services, and whose investment in equipment doesnot exceed the amount specified in Section I, appended

(iv)

Micro Credit :

Provision of credit and other financial services and products of very smallamounts not exceeding Rs. 50,000 per borrower to the poor in rural, semi-urban and urbanareas, either directly or

through a group mechanism, for enabling them to improve theirliving standards, will constitute micro credit . (v) Education loans:

Education loans include loans and advances granted to only individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and do not include those granted to institutions.

(vi)

Housing loans:

Loans up to Rs. 15 lakh for construction of houses by individuals,(excluding loans granted by banks to their own employees) and loans given for repairs tothe damaged houses of individuals up to Rs.1 lakh in rural and semi-urban areas and up to Rs.2 lakh in urban areas.

 Investments by banks in securitised assets, representing loans to agriculture (direct or indirect), small scale industries (direct or indirect) and housing, shall be eligible for classification under respectivecategories of priority sector (direct or indirect) depending on the underlying assets, securitised assets are originated by banks and financial institutions and fulfil the Reserve Bank .  The targets and sub-targets under priority sector lending would be linked to Adjusted Net Bank Credit (Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM category) orCredit Equivalent of Off-Balance Sheet Exposures, whichever is higher, as on March 31 of the previousyear.

 In order to encourage banks to increasingly lend directly to the priority sector borrowers, the banks'deposits placed with NABARD/SIDBI on account of non-achievement of priority sector lending targetswould not be eligible for classification as indirect finance to agriculture/SSI, as the case may be.

What constitutes Direct Finance for Agricultural Purposes ? Ans : Direct Agricultural advances denote advances given by banks directly to farmers for agricultural purposes. These include short-term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank. Direct finance also includes medium and long-term loans (Provided directly to farmers for financing production and development needs) such as Purchase of agricultural implements and machinery, Development of irrigation potential, Reclamation and Land Development Schemes, Construction of farm buildings and structures, etc. Other types of direct finance to farmers includes loans to plantations, development of allied activities such as fishery, poultry etc and also establishment of bio-gas plants, purchase of land for agricultural purposes by small and marginal farmers and loans to agri-clinics and agri-business centres. 5. What constitutes Indirect Finance to Agriculture ? Indirect finance denotes to finance provided by banks to farmers indirectly, i.e., through other agencies. Important items included under indirect finance to agriculture are as under : (i) Credit for financing the distribution of fertilisers, pesticides, seeds, etc.

(ii) Loans upto Rs. 25 lakhs granted for financing distribution of inputs for the allied activities such as, cattle feed, poultry feed, etc. (iii) Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energising their wells. (iv) Loans to State Electricity Boards for Systems Improvement Scheme under Special Project Agriculture (SI-SPA). (v) Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained with NABARD. (vi) Subscription to bonds issued by Rural Electrification Corporation (REC) exclusively for financing pump-set energisation programme in rural and semi-urban areas and also for financing System Improvement Programme (SI-SPA). (vii) Subscriptions to bonds issued by NABARD with the objective of financing agriculture/allied activities. (viii)Finance extended to dealers in drip irrigation/sprinkler irrigation system/agricultural machinery, subject to the following conditions: (a) The dealer should be located in the rural/semi-urban areas. (b) He should be dealing exclusively in such items or if dealing in other products, should be maintaining separate and distinct records in respect of such items. (c) A ceiling of upto Rs. 20 lakhs per dealer should be observed. (ix) Loans to Arthias (commission agents in rural/semi-urban areas) for meeting their working capital requirements on account of credit extended to farmers for supply of inputs. (x) Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture.

What does indirect finance in the small-scale industrial sector include? Indirect finance to SSI includes the following important items: i. Financing of agencies involved in assisting the decentralised sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries. ii. Finance extended to Government sponsored Corporation/organisations providing funds to the weaker sections in the priority sector. iii. iv. Advances to handloom co-operatives. Term finance/loans in the form of lines of credit made available to State Industrial Development Corporation/State Financial Corporations for financing SSIs. v. vi. Funds provided by banks to SIDBI/SFCs by way of rediscounting of bills Subscription to bonds floated by SIDBI, SFCS, SIDCS and NSIC exclusively for financing SSI units. vii. Subscription to bonds issued by NABARD with the objective of financing exclusively non-farm sector. viii. ix. Financing of NBFCS or other intermediaries for on-lending to the tiny sector. Deposits placed with SIDBI by Foreign Banks in fulfilment of shortfall in attaining priority sector targets. x. Bank finance to HUDCO either as a line of credit or by way of investment in special bonds issued by HUDCO for on-lending to artisans, handloom weavers, etc. under tiny sector may be treated as indirect lending to SSI (Tiny) Sector. 10. What type of investments made by banks are reckoned under priority sector ? Investments made by the banks in special bonds issued by the specified institutions could be reckoned as part of priority sector advances, subject to the following conditions: i. State Financial Corporations (SFCs)/State Industrial Development Corporations (SIDCs)

Subscription to bonds exclusively floated by SFCs & SIDCs for financing SSI units will be eligible for inclusion under priority sector as indirect finance to SSI. ii. Rural Electrification Corporation (REC) Subscription to special bonds issued by REC exclusively for financing pump-set energisation programme in rural and semi-urban areas and the System Improvement Programme under its Special Projects Agriculture (SI-SPA) will be eligible for inclusion under priority sector lending as indirect finance to agriculture. iii. NABARD Subscription to bonds issued by NABARD with the objective of financing exclusively agriculture/allied activities and the non-farm sector will be eligible for inclusion under the priority sector as indirect finance to agriculture/ SSI, as the case may be. iv. Small Industries Development Bank of India (SIDBI) Subscriptions to bonds exclusively floated by SIDBI for financing of SSI units will be eligible for inclusion under priority sector as indirect finance to SSIs. v. The National Small Industries Corporation Ltd. (NSIC) Subscription to bonds issued by NSIC exclusively for financing of SSI units will be eligible for inclusion under priority sector as indirect finance to SSIs. vi. National Housing Bank (NHB) Subscription to bonds issued by NHB exclusively for financing of housing, irrespective of the loan size per dwelling unit, will be eligible for inclusion under priority sector advances as indirect housing finance. vii. Housing & Urban Development Corporation (HUDCO)

a. Subscription to bonds issued by HUDCO exclusively for financing of housing, irrespective of the loan sizeper dwelling unit, will be eligible for inclusion under priority sector advances as indirect housing finance. b. Investment in special bonds issued by HUDCO for on-lending to artisans, handloom weavers, etc. under tiny sector will be classified as indirect lending to SSI (Tiny) sector.

what action is taken in the case of non-achievement of priority sector lending target by a bank ? i. Domestic scheduled commercial banks having shortfall in lending to priority sector / agriculture are allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established in NABARD. Details regarding operationalisation of the RIDF such as the amounts to be deposited by banks, interest rates on deposits, period of deposits etc., are decided every year after announcement in the Union Budget about setting up of RIDF. ii. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum. 13. Whether there is any time limit for disposal of loan applications ? All loan applications upto a credit limit of Rs. 25,000/- should be disposed of within a fortnight and those for over Rs. 25,000/- within 8 to 9 weeks. 14. What is the rate of interest for loans under priority sector ?

As per the current interest rate policy, in the case of loans upto Rs 2 lakh, the interest rate should not exceed the prime lending rate (PLR) of the bank, while in the case of loans above Rs 2 lakh, banks are free to determine the interest rate 15. How is priority sector lending monitored by the Reserve Bank ? Priority sector lending by commercial banks is monitored by Reserve Bank of India through periodical Returns received from them. Performance of banks is also reviewed in the various fora set up under the Lead Bank Scheme (at State, District and Block levels).

3. SMALL BUSINESS / SERVICE ENTERPRISES 3.1 Loans granted to small business and service enterprises such as, Small Road and Water Transport Operators, Small Business, Professional & Self Employed Persons, etc. engaged in providing/rendering of services (which are industry or non-industry related), and whose investment in equipment (original cost and excluding land and building) does not exceed Rs. 2 crore. 3.2 (i) Advances granted to retail traders dealing in essential commodities (fair price shops), consumer co-operative stores, and; (ii) Advances granted to private retail traders with credit limits not exceeding Rs. 20 lakh. 3.3 Loans to NBFCs for the purpose of on-lending to various categories of small business and service enterprises. 4. MICRO CREDIT 4.1 Loans of very small amount not exceeding Rs. 50,000 per borrower, provided by banks to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for

enabling them to improve their living standards. 4.2 Loans to urban poor indebted to informal sector Loans to distressed urban poor to prepay their debt to lenders in the informal sector would be eligible for classification under priority sector. Urban poor for this purpose may include those families in the urban areas who are below the poverty line. Such loans to urban poor may be classified under weaker sections within the priority sector. 5. STATE SPONSORED ORGANIZATIONS FOR SCHEDULED CASTES/SCHEDULED TRIBES 8 Advances sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organisations. 6. EDUCATION Educational loans should include only loans and advances granted to individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and not those granted to institutions. 7. HOUSING 6.1 Loans up to Rs. 15 lakh, irrespective of location, for construction of houses by individuals, excluding loans granted by banks to their own employees. 6.2 Loans given for repairs to the damaged houses of individuals up to Rs. 1 lakh in rural and semi-urban areas and up to Rs. 2 lakh in urban areas. 6.3 Assistance up to Rs. 1.25 lakh per housing unit given to any governmental agency/ nongovernmental agency (approved by the NHB for the purpose of refinance) for construction/ reconstruction of houses or for slum clearance and rehabilitation of slum dwellers. 8. Weaker Sections The weaker sections under priority sector shall include the following: (a) Small and marginal farmers with land holding of 5 acres and less, and landless labourers, tenant farmers and share croppers.

(b) Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,000. (c) Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY). (d) Scheduled Castes and Scheduled Tribes. (e) Beneficiaries of Differential Rate of Interest (DRI) scheme. (f) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY). (g) Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavangers (SLRS). (h) Advances to Self Help Groups. (i) Loans to distressed urban/rural poor to prepay their debt to non-institutional lenders, against appropriate collateral or group security. 8. Export Credit This category will form part of priority sector for foreign banks only.

1 LENDING TARGETS 1.1 Based on the recommendations made by the Standing Advisory Committee for PCBs, the targets for lending to Priority Sector and weaker sections have been prescribed for the PCBs as given below: 1.1.1 60% of total loans and advances to priority sector and 1.1.2 Of the stipulated target for priority sector advances, at least 25% (or 15% of the total loans and advances) to weaker sections. 1.2 In order to ensure that credit is available to all segments of Small Scale Industries (SSI) sector, (classified on the basis of investment in plant and machinery), the following subtargets should be achieved: 1.4 The banks should make concerted efforts to achieve the targets and, if necessary, suitably simplify the systems and procedures keeping in view the types of beneficiaries to be financed. 2 CLASSIFICATION OF PRIORITY SECTOR AND WEAKER SECTION ADVANCES 2.1 The types of advances to be reckoned as priority sector advances and those of it to be considered as advances to weaker sections are indicated in Annexure I. 2.2 The definition of weaker section in priority sectors broadly corresponds to the beneficiaries

under the 20-Point Economic Programme aimed at improving the standard of living of the weaker sections of the society. 2.3 For classifying priority sector advances under various categories, it may be noted that the 2 banks should not merely take into account the purpose of the loan mentioned in the borrowers loan application but also the amount involved and should satisfy themselves that the amount borrowed would be utilised for the purpose for which it was sanctioned, by calling for documentary evidence in support thereof, wherever considered necessary. For example, loans to small traders or small businessmen are essentially in the nature of working capital loans and they have to be given primarily against the hypothecation or pledge of the goods in which they are dealing and therefore loans to small traders or small businessmen against gold or jewellery may not necessarily be the loans for undertaking trade or business. Similarly, in the case of a loan for construction of a house, it would have to be satisfied that the borrower has the land and his construction plans bear the approval of the competent authority or he has joined some co-operative society to construct the house. Mere security of jewels coupled with indication of "housing" as purpose in the loan application should not satisfy the bank for classification of priority sector advances. 2.4 Therefore, loans against gold ornaments (jewel loans) which are in a majority of cases availed of by the weaker sections of the society, the purpose of the loan and the loan amount actually sanctioned to each borrower and not the security therefor, should be adopted as the criteria for classification of the priority sector advances and advances given to weaker sections of the society. 3 FLOW OF CREDIT TO SSI INDUSTRIES 3.1 The banks should step up the credit flow to meet the legitimate requirements of tiny and SSI. The credit requirements of the tiny industries should be given preferential treatment while providing credit to this sector. Besides, preferential treatment in providing credit to tiny industries, full working capital limits determined on the basis of need related to the rated capacity of the unit should be sanctioned at the commencement itself. The banks decision regarding credit assistance should be communicated to the applicant as early as possible. Requests for increase in the limits should be considered expeditiously and decisions may be taken and conveyed promptly.

3.2 The banks officials/branch managers should be made aware of the importance of the SSI Sector from the point of view of creation of additional employment opportunities, exports etc. A healthy growth of the sector will facilitate smooth loan recovery in the SSI borrowal accounts and timely assistance will prevent the accounts from becoming sticky. Banks staff should be imparted proper training and the aforesaid aspects should form part of inputs in the training provided. There should be an interaction between the banks staff and the SSI borrowers as part of the training programme. 3.3 With a view to providing better customer service and to ensure that all loan applications relating to SSI/Small borrowers are disposed of expeditiously, the following norms may be adhered to by all the banks provided the loan applications received are complete in all respects and duly accompanied by a check list, if prescribed. 3.3.1 Loan applications in respect of loans up to Rs.25,000/- to SSI/Small borrowers etc. may be disposed of within two weeks from the date of receipt of loan application, 3.3.2 Other cases of loans upto Rs.5 lakh may be disposed of within a period of four weeks from the date of receipt of duly completed loan application. 3.3.3 All such loan applications which are complete in all respects and accompanied by check list where prescribed, should be acknowledged by the bank/branch, on the day the application is received. 4 FLOW OF CREDIT TO MINORITY COMMUNITIES 3 4.1 Primary (urban) co-op. banks should initiate steps to enhance/augment flow of credit under priority sector to artisans and craftsmen as also to vegetable vendors, cart pullers, cobblers, etc. belonging to minority communities. The minority communities notified in this regard are Sikhs, Muslims, Christians, Zorastrians and Buddhists. 4.2 The banks should submit a half yearly statement (as on 31 March/30 September) within 15 days of the close of the relevant half year, showing the progress made in deployment of credit to these communities, to the concerned Regional Office of this department under whose jurisdiction they function, in the format given in Annexure II. 5 MONITORING AND EVALUATION OF PRIORITY SECTOR AND WEAKER SECTION

ADVANCES 5.1 Primary (urban) co-operative banks should take effective steps to achieve the above recommended targets and monitor the priority sector lendings from the quantitative and qualitative aspects. 5.2 In order to ensure that due emphasis is given to lending under priority sector, it is considered desirable that the performance is reviewed periodically. For this purpose, apart from the usual reviews, which the banks are periodically undertaking, specific reviews by the Board of Directors of the respective banks may be made on half-yearly basis. Accordingly, a memorandum may be submitted to the Board of Directors at half-yearly intervals i.e. as on 30 September and 31 March of each year giving a detailed critical account of the performance of the bank during the period showing increase/decrease over the previous half-year as per the proforma given in Annexure III. 5.3 A copy of the annual review as on 31 Marc h may be forwarded to the concerned Regional Office of the Reserve Bank with the Board's observations, indicating the steps taken/proposed to be taken for improving the bank's performance. The report should reach the Regional Office within a month from the end of the period to which it relates. 6 REPORTING REQUIREMENTS 6.1 Primary (urban) co-operative banks should submit on Annual Return as on 31st March each year to the concerned Regional Office of the Reserve Bank in the proforma given in Annexure IV. The return should be furnished within one month from the end of the period to which it relates to the concerned Regional Office. 6.2 Member banks of State Federations may also submit a copy of the above returns to their respective federations in order to enable them to monitor their performance. 6.3 It will be seen from Part I, column 3 to 7 of the Return that under each item of priority sector, advances to weaker sections are also to be included. 6.4 Further, while giving the details of the position relating to advances made to different categories, viz. Scheduled castes, Scheduled tribes, women and others, care must be taken to ensure that there is no duplication in reporting and the figures under columns 23 to 27 thereof in part II of the return indicating the position alone should be reported against the relevant columns in Part I of the return. 7 REGISTER FOR PRIORITY SECTOR/WEAKER SECTION ADVANCES

In order to facilitate compilation of the relative figures, banks may maintain a register to indicate all the items of priority sector advances and also another register for weaker section advances showing particulars, with separate folios to each activity so that the total of advances to priority sector and weaker sections under each activity and to each type of beneficiary may be available at any given point of time. The proforma of these registers may be on the lines of the annual return to be submitted to RBI as given in Annexure IV. 4

Will RBI move on priority sector lending hit NBFCs?

The Reserve Bank of Indias move to remove priority sector status for bank loans to non-banking finance companies had investors rushing to dump shares of NBFCs on Thursday. A priority sector status would have allowed NBFC to access funds from banks at a slight discount to market rates. While the latest RBI move would make funds costlier, NBFC bosses Moneycontrol.com spoke to, seem unperturbed. However, they agreed that the cost of funds would rise due to overall escalation in interest rates, and not just because of the removal of the priority status. The removal of priority sector status will not impact our net interest margins (NIMs), said managing director of Indias largest NBFC in used vehicle finance, Shriram Transport Finance , R Sridhar. Interestingly, the off balance-sheet securitised portfolio, which has 45% of our assets under management, will continue to enjoy priority sector status. Overall rising interest rates would push up our incremental cost of borrowings, he added. Under priority sector lending, NBFCs typically enjoy 100-200 basis points discount on the rate of lending. In turn, it is helpful in maintaining NIMs. Off balance-sheet items are not shown in balance sheet and hence do not normally impact NIMs.

Securitisation involves the creation of asset-backed bonds, which are debt instruments created from a pool of loan assets. The interest payments on the original loans form the cash flows used to pay investors in the bonds. According to Abhishek Kothari, an analyst from Way2Wealth, STF has been aggressive on the securitisation front wherein the portfolio secured was classified under priority sector lending. Securitisation has always helped STF in earning a higher NIM. Currently, all the securitised portfolio of STF which is classified under the PSL category for banks is categorised under off balance-sheet items. Thus we do not expect a major threat to the downfall in their NIMs or to their borrowing capability, he explained. We are increasing our lending rates by 50-60 bps, said V Lakshmi Narasimhan, CFO of Magma Finance. This is however due to general increase in interest rates. We will gradually shift our lending to long-term loan wherein rates are cheaper and stable in nature. The development on PSL does not impact us much in particular. We raise resources from banks to tune of 20%, he added. At 15:00 hours, shares of Shriram Transport and Magma Fincorp were trading at Rs 609 (down 9%) and Rs 70 (up 4.5%).

What is priority sector lending in banks?

Some areas or fields in a country depending on its economic condition or government interest are prioritized and are called priority sectors i.e industry, agriculture. these may further be sub divided. Banks are directed by the state bank of the country that loans must be given on reduced interest rates with discounts to promote these fields. Such lending is called priority sector lending

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.

Revised guidelines on priority sector lending.

Mumbai, Apr 30: The Reserve Bank of India (RBI) has issued revised guidelines on priority sector lending by the commercial banks in which it has revised the eligibility criteria. In the revised guideline, RBI has decided to include those sectors as a part of the priority sector, that impact large section of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises. It has maintained the overall priority sector lending limit at 40% of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposure (whichever is higher) for domestic commercial banks and 32% for foreign banks. For the purpose of calculating the overall limit, it said, that the ANBC or credit equivalent of offbalance sheet exposures will be computed with reference to the outstanding as on March 31 of the previous year. The central bank has increased the cap for home loans... under priority sector to Rs 20 lakh from Rs 15 lakh earlier. Loans up to Rs 20 lakh to individuals for purchase or construction of dwelling unit per family, (excluding loans granted by banks to their own employees) would within the ambit of priority sector, the RBI guideline said. Besides, loans given for repairing damaged houses up to Rs 1 lakh in rural and semi-urban areas and up to Rs 2 lakh in urban and metropolitan areas would also be included as priority sector advances, it said. The central bank has also increased the lending cap for educational loans to Rs 10 lakh form Rs 7.5 lakh for studies in India and Rs 20 lakh from Rs 15 lakh for studies abroad. The RBI has excluded loans to software industry & investments made by banks in recapitalization bonds floated by the government and did not include small road and water...

transport operations from priority sector lending. The revised guidelines are effective with immediate effect, RBI said....

Bank loan to MFIs is priority sector lending: RBI Press Trust of India / Mumbai May 3, 2011, 12:39 IST The Reserve Bank today said that loans extended by banks to microfinance institutions (MFIs) from April 1 onward will be classified as priority sector lending. "Bank loans to all MFIs, including NBFCs working as MFIs on or after April 1, 2011, will be eligible for classification as priority sector loans if, and only if, they conform to the regulations formulated by the Reserve Bank," RBI Governor D Subbarao said in the 'Monetary Policy Statement for FY12'. The RBI has also decided to appoint a committee to review the priority sector lending classification, Subbarao said, adding that the recommendations made by the Malegam Committee for the micro-finance sector have been broadly accepted. As per the RBI norms, banks are required to lend 40% of their adjusted net credit to the priority sector, which includes agriculture, small-scale industries and other poor sections.

In January, an RBI Committee headed by YH Malegam had recommended that interest rates on loans extended by MFIs should be capped at 24% and individual loans should not exceed Rs 25,000. The MFIs were allegedly charging a high interest rate of over 30%. "The Reserve Bank has broadly accepted the framework of regulations recommended by the Malegam Committee. We have, however, adjusted some of the parameters recommended by the committee," Subbarao said. The panel has also suggested that small loans of up to Rs 25,000 could be given to families having an income up to Rs 50,000 per annum. On repayment, it said the borrowers should be given the option of weekly or fortnightly or monthly return of the loan. It has said the recommendations should be implemented from April 1, 2011, for the benefit of the sector. The panel also said at least 75% of loans extended by MFIs should be for income generation purposes. It further recommended that a borrower cannot take loans from more than two MFIs. The RBI constituted the committee in October last year in the wake of allegations that overcharging and the use of coercive recovery practices by MFIs led to a spate of suicides in Andhra Pradesh. The decisions taken by the state government to regulate MFIs slowed down the loan recovery process, hitting the financial health of the sector. It was further aggravated by the reluctance of banks to support MFIs.

Priority Sector Lending- Role of Indian Banks in the MFI Crisis

Microfinance Focus, January 13,2011: The recent crisis in the MFI sector in India is threatening to bring the curtains down for private sector approach to mitigating poverty, what essentially the government thinks is its responsibility. As long as the private sector behaves as per government dictum in spirit and letter, and the government is able to fulfill its administrative and political agenda, the game is fair for all, even if the beneficiaries have no real gains from the entire exercise. This article is being written as a sequel to my, Death of MFIs... I made a statement in the earlier article that all good intentions have a few unintended results. When unintended results have more adverse effects than the intended results, it is time to find new paths rather than solutions within the existing problems. As a history graduate, I will try to draw parallels between Lord Cornwallis's Permanent Settlement in 1793 that had unintended results of producing a class of absentee landlords with disastrous consequences for all stake holders except a colonial government, and the parceling out of wholesale MF loans through privately managed MFIs, that led to the disastrous and unfortunate consequences of indebtness and alleged suicides, and consequent government intervention which has now threatened the very foundations of microfinance - good intentions, unintended results.

The Permanent Settlement

The continuation of Mughal - Diwan system of collecting revenue led to large scale corruption among the officials of The East India Company. In the initial days the EIC parceled out land to the Diwans for a five year period. However, most Diwans either failed to deposit revenue or siphoned away the revenue in collusion with corrupt officials of the EIC. Inevitably, investment and improvement in farm practices were ignored under the Diwan regime that led to large scale famine and devastation. The famines from 1770-1790 is said to have caused the death of 10 million people, about one-third the population of then Bengal Province. Permanent Settlement was the brainchild of Lord Cornwallis the then Governor General and Sir John Shore (to succeed him as GG). Under this scheme, the government fixed the land revenue forever and permanently.

Regardless of the produce, the Zamindars (holding title to the land) were to pay a fixed sum of money to the coffers of the EIC. It was intended that this will result in large surpluses which will find its way back for investment in the agriculture sector.

The main features of the Settlement;

The revenue was fixed for the Zamindar, any surplus was theirs to keep - the higher the surplus the more profitable the Zamindari

The government receipts were guaranteed and there was no scope of budgetary fluctuations

The administration was freed up from ascertaining land revenue every year and could utilize those resources to supervise other administrative tasks, savings in operations cost

The ownership of land was guaranteed as long as payments were made

The unintended consequences:

There was no provision for reduction of revenue for bad crop years or natural calamities, like flood and drought

The land of defaulters was put into auction, which brought in a new class of landlords (absentee) from the cities, who had no roots in the farm system

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Corrupt practices brought more good land into the auction than non productive land Led to abusive tax collection systems - tax had to be paid, regardless Changed farming patterns from staple crops of wheat and rice to cash crops of cotton and indigo in search of higher revenue surplus

There were 4 main players in the system - The government as policy maker, the Zamindars as resource provider to the government, the intermediaries - as tax collectors and the poor farmers who became destitute and bonded laborers.

MFI Parallel

The current MF operations also have four major stakeholders - the government as policy maker, the Banks as supplier of resources, the MFI as distributor and collector of loans, and the poor who are alleged to have been exploited by moneylenders in the guise of MFIs. I will try to answer my own question - does this system lead to making the Banks into absentee landlords, who reap the maximum benefits from this system, turn their eyes away from the excesses committed by the intermediary MFIs, as long as they are able to make payments whether the end result ameliorated poverty, or not? As absentee landlords, do they ignore the ultimate beneficiary to whom they are lending under priority sector and inadvertently allow the intermediaries (MFIs) to commit excesses in repayment collection and charge exorbitant rates, as long as the Bank money and margins are perceived to be safe and secure.

The Regulator

The government through RBI since 1968 has laid down that a percentage of the credit - now standing at 40% of the total portfolio of a commercial bank must go to meet the needs of the Priority Sector. Lending to priority sector is defined vide RBI Master Circular No. RBI/2010-11/80 RPCD. CO. Plan.BC.10/04.09.01/ 2010-11 Dated July 1st 2010, and can be found here Click; Lending to MFIs/NBFCs has been provided for in this Master circular, "

1. Micro Credit: Provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower, either directly or indirectly through a SHG/JLG mechanism or to NBFC/MFI for on-lending up to Rs. 50,000 per borrower, will constitute micro credit. Pasted from http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5818 The government has played its role by laying down the policy that the priority sector must not be starved of credit which it very much needs. It is another matter that even after over 40 years, the scheme has not been embraced by commercial banks as either a social or economic proposition. There are reports of large scale window dressing, resistance, and lack of seriousness by banks and their employees in pursuing priority sector lending. However, that is not the point we are

discussing here - the intention is to make 40% of the Bank credit available to the priority sector. As long as statistics prove it, social performance (whether working/not-working or effective/ineffective) has not been a serious issue.

The Banks

The Banks find it extremely difficult to meet priority sector targets - both in terms of quality and quantity. They often do not have skilled personnel ready to undertake priority sector loans, follow-up and supervision. It is therefore tempting to use the MFI/NBFC provision to make up the priority sector targets. MFI loans for Banks are large loans and require comparatively less credit skills. MFI loans are given out at 13% - above earlier PLR and a 1-2% loan processing fee. These loans are made out for a two-three year period usually matching with the loan cycle of the MFIs. They are also mostly given out as term loans and not automatically recyclable loans. Any portion of principal that is repaid, cannot be redrawn until the entire principal has been repaid. These loans have the largest margin for Banks, other than personal loans and credit card balances. Under the PLR scheme a Bank could not make retail MF loans at higher than PLR, yet they were making wholesale MF loans (at a much lower cost of operation to the same beneficiaries) at a higher rate- a clear circumvention of rules! At the same time the RBI Governor was asking for reduction in interest rates for microfinance loans.

Much like the Zamindars of the Permanent Settlement, the Banks become unconcerned about the ultimate beneficiary who is the user of their funds. As a result of this, Yes Bank has recalled its loan from MFIs when it knows that the money is employed elsewhere, and the MFIs have failed to collect them due to circumstances extraneous to their own. Instead of working with them to find a solution and reaching out to the beneficiaries, it believes that by recalling - the money will return. All it is interested in is getting the money back irrespective of the underlying conditions. While the Banks reap the benefit of lending to priority sector, they have no linkages with the priority sector. Like the Zamindar did not know the farmer who was the real producer of its revenues and relied on the collecting machine of the intermediaries, the Banks have lost view of the real beneficiary and rely on the smoothly oiled distribution and recovery machine of the MFIs to lend and recover money - all for it to earn its profits and secure the principal. While the

loan is meant to meet the working capital and cash flow gap of the borrower, by lending in the form of term loans, the Banks inadvertently squeeze the borrowers working capital need by ensuring that an equal sum of principal is repaid at equal intervals, regardless of the circumstances of the borrower - akin to the fixed revenue of the Permanent Settlement. The Banks thus have become the new absentee loan provider of micro finance customers, and behave as one.

The MFIS

As a great admirer and follower of Peter Senge's - The Fifth Discipline, I quote here, "Set the structure and behavior will follow." Most times, we narrate an event to analyze a behavior where actually behavior is the result of the structure under which we function, event being merely a result. We cannot do/undo behavior by dealing with events, we need to set the structure right. What the MFIs have been accused of - exorbitant interest rates, abusive collection practices or multiple lending without proper need assessment - are merely events, that have resulted out of the behavior that emanates from the structure under which MFIs work as intermediaries for an absentee loan provider. Regardless of their mission - I am sure most MFIs do not consciously drift from - they work under a system where the mission is greatly divorced from reality. To do what they call - 'eradicate poverty' - the Congress Party under Mrs. Gandhi coined it first, 'Garibi Hatao' and did away with it, as it realized that it is impossible to eradicate poverty without eradicating the poor, which it never meant to - the MFIs will have to eradicate the poor. An impossibility and a crime against humanity. That is exactly what it is now accused of under the AP act - abetting or causing suicide.

A summary of the unintended behaviors, drawn in parallel with those of the Permanent Settlement;

There is no provision for rescheduling repayments, for whatever reason. This author was told by some of the borrowers in Andhra Pradesh that after the devastating floods of 2009, while borrowers had lost everything, and their homes were inundated, the MFIs

were still holding meetings for weekly collections. After all they could not default with the Banks from whom they had borrowed and risk their credit rating.
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Since the Banks charge loan processing fees, the MFIs pass this on to the borrowers as an additional charge and add a margin to what they pay to the banks, though these are also accounted for in their cost of operations - double counting.

MFI loans help the Banks trim their workforce as they make wholesale loans with no responsibility to undertake minimum post-sanction responsibilities.

New and innovative non-transparent commission and interest charge practices have been introduced by many MFIs, as against standard banking practices, which results in higher hidden charges for the borrower.

The Structure that is giving rise to the current unintended behavior is;
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Target oriented policy that does not simultaneously take stock of social and economic impact but greatly oriented towards political impact

Target achieving agencies, that do not take responsibility and accountability for economic and social impact but greatly oriented toward administrative impact

Target delivering agencies that have to continuously churn money by fulfilling disbursement and collection targets

Poor people whose poverty the above agencies have taken responsibility to eradicate - but have no voices in designing a system that will be mutually beneficial to all stakeholders and help in the progress of the country.

The Beneficiaries

The author in no way is suggesting that the existing system of delivery of microfinance loans is a complete failure. However, the question is, are some of the unintended consequences important enough to result in causing systemic financial distress and undoing the good that has been achieved? It is clear that the beneficiaries are being affected by the insensitivities of an absentee loan provider who is only interested in the payment of interest and repayment of principal. Due

to its own absenteeism it is not in the position to examine the practices of the intermediaries, who are essentially its representative to fulfill its priority sector targets. The intermediaries are under dual pressure of its own shareholders and the absentee loan provider to meet all targets and deliver handsome returns to attract more capital. The system has in its application given rise to exercise of excesses to satisfy multiple stakeholders, except those for whom the system was initiated - maybe an extreme position, but there is some evidence of this.

The Way Forward:

The Regulator

Currently the Banks through RBI as regulator come under the central and concurrent list, while the MFIs come under the State list. This can create discrepancies between how the banks treat the MFI as their client, and how the MFIs treat the borrowers as their client. For instance, while RBI is seemingly not against Banks levying loan processing fees (LPF), the State starting with AP, have banned LPF. The MFIs will not be able to pass on the cost which it pays over and above its funding and operations cost. The regulator has to also ascertain whether LPF is leviable at all by Banks if they claim that operations cost is included in their interest spread. All costs that are part of the interest spread cannot be charged as separate fees.

The regulator also has to ascertain the failure of the Priority Sector Credit policy - bar the statistics. Many Banks prefer to invest in low yield bonds than meet their priority sector lending targets. There have also been allegations of Banks buying out priority sector portfolio on reporting dates for window dressing their balance sheets. The question to ask will be, whether the resistance to priority sector lending from Banks is a pricing issue, risk issue, skills and knowledge issue or attitude issue? Policies can then be set to meet or make available the resources needed to make priority sector lending a success and meet its real purpose.

The Banks

Have the Banks violated the PLR cap for microfinance prior to 1st July 2010 by charging higher

rates for indirect MF loans? As per rules of criminal jurisprudence, where one has no right at the time of acquisition, that non-right cannot be rectified by a subsequent act and has to revert to the position before such acquisition. For example, if A stole a car and sold it to B who paid a fair consideration for the same, B will not have a right to the property, because A never had a right to the property in the first place. B therefore has to return the property to the rightful owner and may sue A for return of consideration. In the case of Banks, since they did not have right to charge above PLR, they cannot keep the interest so charged and will have to return it to the ultimate beneficiary, who have paid the higher rate.

The Banks will have to take charge of their portfolios and supervise the same as they do with other credit facilities. Microfinance and microenterprise borrowers will need to be given similar facilities as larger borrowers. For instance, regular repayment may be in order for asset acquisition, a regular weekly or monthly repayment is out of place for working capital needs - it defeats the very purpose of the loan and may encourage the borrower to fudge funds by borrowing from different sources to repay different sources. Banks need to answer - do they ever expect large enterprises to repay their working capital loans? In fact, all banks are looking for enhancement of all those facilities every year. Then why should a micro entrepreneur repay working capital principal and starve itself of financial needs for its business? The healthiest micro enterprise is that which repays its interest liabilities regularly and looks for enhancement of principal through financial discipline and enterprise development.

More work needs to be done about how Banks can take higher responsibility and treat microfinance as a viable business vertical rather than take the role of absentee financiers. They also need to take on the role of supervisors of MFIS in terms of their following banking rules and regulations rather than behave like moneylenders and make their own rules and regulations. Like the PFF of Bolivia they may be allowed to become second tier Banks, or like Indonesia a commercial Bank may be authorized as intermediary regulator of an MFI ( for more details please refer Microfinance Regulation in Developing Countries: A Comparative Review of Current Practice by Patrick Meagher

IRIS Center, University of Maryland October 2002)

My initial thoughts are on refunding the excess interest charged, converting NBFC MFIs to BCs of Banks in charge of MF portfolio, restructuring the loans of MFI borrowers and segregating term loans and working capital loans - with equated payments for the former and interest only repayments and regular review for the latter. The above will all help to bring down the operations cost - as the regular disbursement and repayment cycle will stop. Some of that time can be utilized on building relationships and financial education of borrowers. Village adoption schemes or/and setting up local credit bureaus will help to flag off multiple lending and proper assessment and appraisal of financial needs.

The MFIs

With minimal regulation and even less supervision from the primary lenders of their funds, the MFIs as intermediaries of priority sector lending policy of the country have become the main tool for distribution and collection of loans. As long as the MFI is in business and the Banks get their money back along with fulfilling of targets, no questions have been asked, until now. Mostly, the attitude towards MFIs has been, if their mission is good, they will do good. We therefore hear that the MFIs had mission drift and therefore were not doing what they were meant to do - more of intellectualizing the problem rather than looking at brass tacks. A closer look will suggest that the system is such that they have no other way to function, than the way they do. They have to work under a system where anything more than an one percent NPA is disastrous for their balance sheet, where they have to meet private investor expectation of above 3% return on asset and 20% return on equity and meet the repayments to the Banks - they are under dual administration like that of Robert Clive's East India Company administration. No private sector equity, no banking sector funding. Something has to change. The structure has to give MFIs more opportunities to fulfill their mission rather than fulfill targets of other agencies.

The MFI compensation structures and governance need a complete re-look. Most for-profit MFIs are today headed by private equity professionals whose success lies in attracting equity for

increasing portfolio size and have little knowledge about ground level reality. The rewards are also geared towards increasing portfolio size. It is surprising that MFI bosses who are responsible for doing what the Banks are unwilling to do in a direct manner - lend and recover money - are in many cases paid higher salaries than the Bankers, or are they paid to raise equity at a promise of unsustainably high return? At the same time, the field workers of MFIs who are good at doing what the bankers are unable to do, get lower salaries than the bankers pay to their field workers, for similar jobs!

The Beneficiaries

In the scheme of things the borrowers are responders than initiators. Yet, they have a responsibility to borrow for business needs or even for personal needs provided it adds value to their business needs. Financial education by the lending agencies can go a long away to inculcate responsible borrowing.

In summary, we need deeper involvement, higher accountability, responsible lending and full transparency, compassionate collection and full responsibility from all the four stakeholders to make priority sector lending the force it is meant to be for the eradication of poverty and not eradication of the poor. The current slant towards attracting private investors needs to get a relook. As the AP government officials have suggested to the Malegam committee - no IPOs for MFIs. Let the Banks take direct responsibility for their portfolios and utilize the services of MFIs as delivery channels - exactly what they are doing now, but without the concomitant responsibility and accountability. --------------About the Author: Sanjay Behuria is an independent consultant in the areas of Financial Inclusion and Enterprise Development. He currently sits on the KBS LAB (A BASIX owned Bank) Board as an independent director. The opinions expressed in this article are solely that of the author.

Principles of lending & Priority sector finance in Banks

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Cardinal principles of lending are Safety and liquidity , Profitability and diversifications of risks and Productive purpose and security

Liquidity with a banker means Cash on Hand, Cash and Bank balances and Short term current assets to convert into cash

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Customer profitability analysis means Assess the profitability of customers business Banker can reduce risk in lending to a borrower by ensuring that there will be no default on account of lack of liquidity and lack of willingness to pay on the part of the borrower

In bankers parlance, credit risk in lending refers to default of repayment by a borrower

Working capital means requirements for the day-to-day transactions



Term loans mean loans payable after one year to ten years, Repayments are done in installments and Term loans are utilized for acquisition of fixed assets

Working capital needs are estimated by Operating cycle method or Projected turnover method or Cash budget method

Housing loans granted to individuals upto Rs. Twenty lakh for construction of houses (Excluding loans granted by banks to their employees) are treated as priority sectoradvances

Educational loans should include only loans and advances granted to individuals for educational purposes up to RsTen lakh for studies in India, to be classified as prioritysector

The Scheduled commercial banks are expected to enlarge credit to the priority sectorand ensure that priority sector advances constitutes 40% of net bank credit

Kisan cards are issued to farmers to enable them to Meet their cultivation needs and nonfarm requirements , including purchase of inputs and other short term requirements and working capital requirements for allied activities

  

Under farm mechanization scheme, loan is given for Purchase of farm equipments The export finance made by Foreign Banks is reckoned as priority sector advance The export credit target for foreign banks in India is 12% of ANBC

SCs/STs not benefiting from priority sector lending They rejected the reply of Minister of state for Finance Namo Narain Meena in which he read out figures of the beneficiaries of various schemes and the allocations made for that.

Responding to the Government's reply of March 11 on the Priority SectorLending, Jyoti Dhruve and Arjun Meghwal of the BJP, Paramjit Kaur Gulshan of the SAD and Shailendra Kumar of the SP sought to highlight that despite all directions to the bank to give loans to weaker sections without collateral security, these sections were not being credited.

They also sought to draw the attention of the Government that the highinterest on education loan was deterring the weaker sections from going in for that.

Ms Dhruve expressed concern over the money meant for SC/STs being diverted to other uses, and quoted a parliamentary report in support of her statement.

Mr Kumar wanted quota for these sections in the private sector.

The Minister said the Government was making all out efforts to give priority to these section in lending. He pointed out that Rs 2,252 crore loan was made available to Sc/STs in 2009-10. The share of these classes in the total Rs 36,000 crore loan was 17.69 per cent in 2010. Moreover, under this year's Budget, 40 lakh students of these classes would be given pre-metric scholarship.

He said the loans under priority sector lending did not require collateral security, but at this point he was fiercely attacked by all the opposition members led by the BJP. They said the fact was

that the weaker sections were not being loan at all under the scheme.

The Minister also said that under the DRI scheme, 48 per cent of the target had been achieved in 2010.

However, the Opposition members were not satisfied with his reply, saying he had not responded to the concern expressed by them. --UNI