RBI Panel increased Priority Sector Target for Foreign Banks to 40% of Net Bank Credit

The Reserve Bank of India (RBI) panel on priority sector lending on 21 February 2012 proposed increment in the target (priority sector) for foreign banks to 40% of net bank credit from the current level of 32 per cent with sub-targets of 15 per cent for exports and 15 per cent for the MSE sector. In the MSE sector 7 per cent of net bank credit is to be earmarked for micro enterprises.

The target of domestic scheduled commercial banks for lending to the priority sector is to be retained at 40 per cent of net bank credit.

The committee, under the chairmanship of M. V. Nair, Chairman, Union Bank of India re-examined the existing classification and suggested revised guidelines with regard to priority sector lending and related issues.

Recommendations

The panel suggested focussed lending to small farmers and micro-enterprises who are excluded from formal financial channels.
Farm sector.

Farm sector

The committee noted that small and marginal farmers constituting more than 80% of total farmer households in the country face exclusion from formal financial channels.

The committee suggested that the sector agriculture and allied activities be made a composite sector within the priority sector, by doing away with the distinction between direct and indirect agriculture. It suggested fixing of the targets for agriculture and allied activities at 18 per cent. A sub-target for small and marginal farmers within agriculture and allied activities equivalent to 9 per cent is to be achieved in stages by 2015-16.

MSE sector

The MSE sector may continue to be under the priority sector. The panel recommended a sub-target for micro enterprises within the MSE sector equivalent to 7 per cent, which also is to be achieved in stages by 2013-14.

Banks, as per the report should ensure that the number of outstanding beneficiary accounts register a minimum annual growth rate of 15%. The report called for a sub-target for micro enterprises of 7% of ANBC or CEOBE, whichever is higher to be achieved in stages by 2013-14. This would be within micro and small enterprises (MSE) covering almost 26 million units across the country.

Housing & education loans

The loans to housing and education may continue to be under the priority sector. It sugggested granting of 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 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.

The panel suggested making food and agro-based processing with an initial investment in plant and machinery up to R20 crore eligible for loans under priority sector and that there be no ceiling for loans for units that process perishable agriculture produce. The measure is expected to boost processing levels in India, which currently is extremely low at around 6% compared with over 30% in most Asian and Latin American developing countries.

The commmittee feels that limit for loans for studies in India  should be increased to Rs 15 lakh while for studies overseas, it should go up to Rs 25 lakh, from the existing limits of Rs 10 lakh and Rs 20 lakh respectively. According to committee, the Differential Rate of Interest (DRI) scheme has become obsolete and should be scrapped.

Bank loans to non-bank financial intermediaries

The objective of reaching out to a large number of small and marginal farmer households and micro-enterprises in defined time-frame could be supplemented by allowing bank loans to non-bank financial intermediaries for on-lending to specified segments to be reckoned for classification under priority sector, up to a maximum of 5% of ANBC or CEOBE, whichever is higher.

Further, allowing non-tradable Priority Sector Lending Certificates (PSLCs), on a pilot basis, that can be only transacted between domestic scheduled commercial banks, foreign banks and RRBs, may lead to the development of a market for PSLCs, the committee feels.