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  1. 1. 1 PRIORITY SECTOR LENDING BACHELOR OF COMMERCE BANKING AND INSURANCE SEMESTER – V (ACADEMIC YEAR -2013-14) SUBMITTED BY AARTI YADAV ROLL NO – 49 N.E.S RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE, BHANDUP (W), MUMBAI – 400078.
  2. 2. 2 PRIORITY SECTOR LENDING BACHELOR OF COMMERCE BANKING AND INSURANCE SEMESTER – V SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF BACHELOR OF COMMERCE, BANKING AND INSURANCE BY AARTI YADAV ROLL NO – 49 N.E.S RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE, BHANDUP (W), MUMBAI – 400078.
  3. 3. 3 DECLARATION I AARTI YADAV THE STUDENT OF B.COM BANKING AND INSURANCE SEMESTER V (2013-14) HEREBY DECLARE THAT I HAVE COMPLETED THE PROJECT ON PRIORITY SECTOR LENDING. THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE. SIGNATURE OF STUDENT (AARTI YADAV) ROLL NO -49
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  5. 5. 5 Acknowledgement I would like to express my sincere gratitude to our principal MRS. RINA SAHA and our course coordinator MRS. RIYA RUPANI of NES RATNAM COLLEGE OF ARTS, SCIENCE & COMMERCE for providing me an opportunity to do my project work on “prIorIty Sector LendInG”... I sincerely thank to my guide MRS. JIA MAKHIJA, for guidance and encouragement in carrying out this project. She gives me moral support and guided me in different matters regards to this topic. Last but not the least I would like to avail myself of this opportunity, express a sense of gratitude and love to my friends and my beloved parents for their manual support, strength, help and for everything. (AARTI YADAV)
  6. 6. 6 executive Summary on priority sector lending Priority sector bank lending has been an instrument of India’s financial policy which aims at restoring sectional balance within credit disbursement and for challenges credit to the weaker sections within these sectors. The Bank Company Acquisition Act 1969 leading to the nationalization of the 14commercial banks has implicitly made it clears in its preamble. There has been a substantial reorientation of banking policy after the nationalisation of banks in 1969. This has been accomplished through social orientation of banking andadministrative intervention. The priority sector lending has emerged in the period after the nationalisation of banks in 1969. The following are the 4 pillars of the edifice of the priority sector. Targets and sub-targets financing of specific sectors has been envisaged. The share of priority sector in total bank advances is 40 percent sub-targets for agriculture and weaker sections are fixed at 18 percent and 10 percent of total Advances respectively. The interest rate policy under priority sector and nonpriority sector has been stipulated. Concessional rates of interest for priority sector advances and relatively higher rate of interest for other sectors has been a special feature. To insure against the risk of default of loan account a separate insurance scheme guaranteeing a part of the loan of commercial banks was introduced in 1970 and the DICGC of India was established. The Corporation also provides deposit insurance to the depositors up to a prescribed limit.
  7. 7. 7 Reserve Bank of India (RBI) came out with Master Circulars on various topics containing directions to the banks. Among these was also the Master Circular on Priority Sector Lending, containing directions to banks, including Scheduled Commercial Banks and Regional Rural Banks. This post discusses the key features of the Master Circular on Priority Sector Lending as addressed to Scheduled Commercial Banks (excluding Regional Rural Banks). Notably, the recommendations of Report of the Nair Committee on Priority Sector Lending which were released in February 2012 have not been implemented by the RBI .
  8. 8. 8 SR.NO TOPIC PAGE NO 1 Introduction 2 History and Backgrounds of Priority sector lending 3 The Pre and Post Reform Period 4 The Thrust Areas of Priority Sector Lending 5 Need for Priority Sector Lending 4 Changing Criteria of Priority Sectors 5 Interest Rate Structure on PSL 6 Analysis of NPA in priority sector lending a comparative study on public sector bank and private sector bank 7 RBI widens scope for priority sector lending, hikes MSME credit limit 8 RBI changes rules on priority sector lending 9 Include export credit in priority sector lending for all banks 10 LENDING TO PRIORITY SECTOR- Reserve bank of india 11 COMMON GUIDELINES FOR PRIORITY SECTOR ADVANCES
  9. 9. 9 1. Introduction: The diversification of a large fraction of bank credit from the traditional sector to the priority sector is a remarkable feature of credit deployment in the post nationalization era. The concept of priority sector lending (PSL) is mainly intended to ensure that assistance from the banking system in an increasing manner to those sectors of the economy which has not received adequate support of institutional finance. The Reserve Bank of India (RBI) emphasized that the priority sector comprised of agriculture (direct and indirect finance), small scale industries (SSI), small road and water transport operators, small business, professional and self-employed persons, education, housing, micro-credit, weaker sections1 etc. RBI monitors the PSL by commercial banks through periodical return received from the banks and the performance of banks is reviewed in various foray set up under the lead bank scheme Since seventies, RBI and government of India have stipulated some guidelines viz, financing in the priority sector on an increasing scale, more deployment of credit backward regions, preparation and implementation of credit plan and
  10. 10. 10 measures for enhancing productivity, employment and economic growth with social justice (Narasimham, 1994). Weaker sections, which come under priority sector for lending purposes, hitherto included scheduled castes, scheduled tribes, small and marginal farmers, artisans and distressed urban poor indebted to non-institutional lenders. Within priority sectors, domestic commercial banks have to give 10 per cent of their net lending to weaker sections, but no such specific target is set for foreign banks., The banks, without insisting adequate security, have supplied advances to priority and other neglected sections of the society at a concession rate of interest. However, the banking statistics revealed that, this designated priority sector as well as neglected sections received about 15 per cent of the total bank credit at the time of bank nationalization On the later period, proportion of advances to the priority sector has increased from 15 per cent to 33.3 per cent in 1974 and further to 40 per cent in 1980. The commercial banks have achieved the target and even surpassed it in quantitative terms. But in qualitative terms, there is an apprehension among the bankers that the advances to priority sector resulted in a loss of interest income
  11. 11. 11 due to highly subsidized lending rates. As a result, the profitability of banks has adversely affected besides maintaining additional manpower requirements for supervision of small loans, mounting over dues, poor recovery of advances and raising volume of non- performing assets (NPAs) (Niranjana and Anbumani, 2002). The Narasimham Committee (1991) on financial sector reform has drawn attention to the problem of low and declining profitability and stated that there is need for gradual phasing out of the directed credit programme, i.e. the stipulations that 40 per cent of all credit should go to the priority sector should be scrapped. The priority sector should be redefined and the proportion shall be fixed at 10 per cent of the aggregate credit. Subsequently, the committee (1998)4 indicated that timely and adequate availability of credit rather than its costs is very Asian Journal of Finance & Accounting ISSN 1946-
  12. 12. 12 Historical Background of Priority Sector Lending As far back as in 1967-68, the RBI in its credit policy has introduced the concept of PSL to tide over the severe imbalances, existed then both in agricultural and industrial fronts. In order to channelize the flow of credit to the priority sectors RBI had enunciated a credit policy. The major implement before the introduction of the concept of PSL was that for various historical reasons, the bulk of bank advances was directed towards medium and large scale industries and big business houses, whereas, sectors like culture, small scale industries and export were languishing for want of funds. The concept of PSL was evolved to ensure the flow of adequate credit from banks to certain prioritised segments of the economy, as enunciated in the national planning priorities To give incentive to banks for lending to small borrowers under priority sector. the RBI in January 1971, has set up the Credit Guarantee Corporation of India Limited . now known as the Deposit Insurance and Credit Guarantee Corporation . The idea was to administer a comprehensive credit guarantee scheme for loans by banks to the individual small
  13. 13. 13 borrowers under the priority sector. During the period of social control of banks, major banks did make an attempt to assist the agricultural sector by providing credit for marketing of agricultural products. Despite commercial banks' lending to agriculture under a) direct financing and b) indirect financing, the lending towards agriculture did not exceed two per cent of the total credit. It was in the post-bank nationalisation period only the PSL and mass banking concepts were crystalized for the purpose of credit deployment. After the bank nationalisation in July, 1969, RBI has adopted lending to the following broad segments under priority sector: (a) agriculture, (b) small scale industries and (c) exports. The composition of the priority sector remained somewhat vague even after the bank nationalisation. There was wiles variation as far as compiling PSL data are concerned among various banks. Later a more comprehensive classification of categories under PSL was evolved and adopted on the basis of a report submitted by Informal Study Group on statistics relating to priority sectors constituted by RBI'. Agriculture - direct and indirect finance Small scale industries. 'R. Srinivasan, Priority Sector Lending - A study of Indian Experience, Himalaya 'publishing Rouse, 1 995, Bombay, p .46, r Industrial estates. Road and water transport
  14. 14. 14 operation.0 Retail traders. Small business ,Professionals and self- employed persons. Education The composition of PSL was reviewed in the early eighties when the 20- Point Programme and IRDP were introduced. These programmed were dovetailed with bank assistance in the form of loan under weaker section beneficiaries within priority sector and a separate sub-target for lending to them was introduced. In the meeting that the then Union Finance Minister had with the Chief Executives of public sector banks on 15" February, 1982, it was decided that all Commercial banks should actively participate in the implementation of 20-Point Programme In November, 1974, banks were advised to raise the share of PSL to 33.3 per cent by March, 1979'. Private sector banks were also advised to achieve the same target. RBI has directed all the Commercial banks to ensure the flow of 40 per cent of the net bank credit to priority sector by March 1985 from the then stipulated level of 33.3 per cent. The increase in the percentage flow was emphasised mainly to ensure that adequate flow goes to the weaker section beneficiaries particularly under IRDP. The system of giving separate sub-targets for agriculture and weaker section was started during the early eighties,
  15. 15. 15 The Pre and Post Reform Period Following are some of the major features of priority sector targets and classifications. sector credit, sub targets of agricultural and weaker sections respectively remain same in bot the periods. have been introduced for the foreign banks which were not there earlier even for domestic banks. -reform period agricultural credit was earmarked directly for farmers but majority of whom, were small and marginal farmers. Agricultural credit was mainly for agricultural purposes, production, storage and transportation of agricultural or allied product. considered under priority sector has been increased to Rs. 1 lakh.
  16. 16. 16 Earlier credit to plantation crop was restricted to only small and marginal farmers, but it is given irrespective of size. In the category of direct advances to agriculture new acquisition of jeeps, pick up vans, mini buses, etc., have been included. These naturally will not be acquired by small and marginal farmers. y sector target earlier. Now finances to dealers, commission agents, non-6 banking financial companies, state electricity board and investing in selected bonds and depositing in apex level are not going to help farmers directly. ro processing in the priority sector will give impetus and boost up the production of food crops. to include business under enterprises with original cost price of equipment used for the purpose of business up to Rs. 10 lakhs from Rs. 2 lakhs earlier.
  17. 17. 17 priority sector. These are not employment generating activities. They do not belong to weaker sections either. road network are included in priority sector. ceilings up to Rs. 5 lakhs which can very well cover requirements of middle class people even in urban areas. nder priority sector loan. Similarly consumption loan too is covered by priority sector credit. The above changes in the post bank reform era have led to the following aspects of priority sector credit by banks as of March 2001. a) Agriculture (direct and indirect)
  18. 18. 18 b) SSI (including the setting up of industrial estates and covering units with original cost of plant and machinery not exceeding Rs. 10 million)7 c) Small business (original cost of equipment used for the business not exceeding Rs. 1 million and a working capital of Rs. 50,000) d) Small road and water transport operators owning 10 vehicles. e) Retail trades (up to Rs. 50,000) f) Professional and self employed persons (up to Rs. 50,000) g) State sponsored organizations for scheduled castes and scheduled tribes. h) Education (educational loans granted to individuals) i) Housing loan (direct and indirect) up to Rs. 50,000.
  19. 19. 19 j) Consumption loan under the consumption credit scheme for weaker sections. k) Refinance by banks to RRBS. l) Micro credit (direct and indirect) m) Software industry (up to Rs. 10 million) n) Agro and food processing sector and o) Venture capital. Advances to Weaker Sections The weaker section loan is given to the followng categories of beneficiaries: a) small and marginal farmers with land holding of less than 5 acres or landless laborers’, tenants and share croppers.
  20. 20. 20 b) artisans (irrespective of location) or small industrial activities in villages and small towns with a population not exceeding 50.000 involving utilisation of locally available natural resources and or human skills with individual credit requirements not exceeding Rs.25,000. c) Beneficiaries of IRDP. d) Scheduled Castes and Scheduled Tribes. e) Beneficiaries under DRI scheme. Agricultural financing According to the annual of Instructions of Indian Bank that the credit needs of a farmer are met through broad categories of direct and indirect finance. In terms of RBI directives, the banks should achieve a target of 18 per cent of the net bank credit under agricultural
  21. 21. 21 advances (direct and indirect put together) with a stipulation that the agricultural lending’s under the indirect category shall not exceed one-fourth of 18 per cent, that is, 4.5 per cent of net bank credit. 1 Direct Finance Under this category, loans can be classified as (a) Short term loan and (b )medium and long term loan. Short term loan consist of short term production loan or crop loan. medium and long term loan includes activities like minor irrigation, fm land development, farm machanisation, plantation and horticulture, all activities allied to agriculture. Indirect Finance to Agriculture Distribution of fertilisers, pesticides and seeds, loans to Electricity Boards, loans to fanners through Primary Agricultural Credit
  22. 22. 22 Societies, Farmers Service Socieities and Large sized Multi Purpose Societies are done under indirect finance. Financing of Small Scale Industries (SSI) The SSI sector4 covered wide range of enterprises with diverse characteristics. There are tiny or micro enterprises on the one hand and sophisticated, modem small scale units on the other hand. SSI undertakings are those which are engaged in the manufacture, processing or preservation of goods in which investment in plant and machinery (original cost) does not exceed Rupees Three crores. Ancillary industrial undertakings are also classified as SSI not exceeding Rupees Three crores. Indirect Finance to the Small Scale Industrial Sector a) agencies involved in assisting the decentralised sector in the supply of inputs and marketing of output of artisans, village and cottage industries.
  23. 23. 23 b) Government sponsored corporations/organisations providing funds to the weaker sections in the priority sector. c) Term financial loans in the form of lines of credit made available to State Industrial Development Corporations /State Financial Corporations for financing SSIs. d) Credit provided to Khadi and Village Industries Commission by consortium of banks for lending to viable khadi and village industrial units. e) Subscription to bonds floated by SIDBI. State Financial Corporations. Small Industrial Development Corporations and National Small Industries Corporation. f) Subscription to bonds issued by NABARD with the objective of financing exclusively for non-farm sector. g) Loans for setting up of Industrial Estates.
  24. 24. 24 Other borrowers Other borrowers in the priority sector % or : small road and water transport operators retail traders small business operators professional and self-employed persons State sponsored organizations for Scheduled Castes / Scheduled Tribes students for educational purposes Housing borrowers belonging to weaker sections taking pure consumption loans. 1Small Road and Water Transport Operators Advances to small road and water transport operators owning a fleet of vehicles not exceeding six, including the one proposed to be financed. 2 Retail Traders Advances granted to (i) private retail traders dealing in essential commodities (FPS) and consumer co-operative stares and (ii) other private retail traders with credit limits not exceeding Rupees two
  25. 25. 25 lakhs(Advances to retail in fertilizers form part of indirect finance for agriculture and those to retail traders and mineral oils under small business). 3 Small Business Operators Small business would include individuals and firms managing a business enterprise established mainly for the purpose of providing any service other than professional services whose original cost price of the equipment used for the purpose of business does not exceed Rs.10 lakhs with working capital limits of Rupees Five lakhs or less. Further, the aggregate of Term loan and working capital limits sanctioned to a small business unit should not exceed Rs.10 lakhs. Advances for acquisition, construction, renovation of house-boats and other tourist accommodation are also included, Distribution of mineral oils shall be included under "small business".
  26. 26. 26 4 Professional and Self-Employed Persons Loans to professional and self-employed persons include loans for the purpose of purchasing equipment, repairing or renovating existing equipment and for acquiring and repairing business premises or for purchasing tools and or for working capital requirements to medical practitioners including dentists, chartered accountants, cost accountants, lawyers or solicitors, engineers, architects, surveyors, construction Contractors or management consultants or to a person trained in any other art or craft who holds either a degree or diploma from any institution established, aided or recognised by Government or to a person who is considered by the banks as technically qualified or skilled in the field in which he is employed. Advances to accredited journalists, cameramen , practising Company Secretaries, running health centre and also for setting up of beauty parlours are also considered under this category. Only such professional and self-employed persons whose borrowings (limits) do not exceed Rupees Five lakhs (of which not more than Rupees one lakh should be for working capital requirements) are covered under this category. However in the case of professionally
  27. 27. 27 qualified medical practitioners setting up practice In semi-urban and rural areas, the borrowing limits should not exceed Rupees 10 lakhs of which not more than Rupees two lakhs should be for working capital purposes. . 6 Educational Loans Educational loans to students include only loans and advances granted to individuals for educational purposes and not those granted to Institutions and will include all advances granted by banks under special schemes, if any, introduced for the purpose 7 Housing Activities (a) Direct finance i. loans up to Rupees Three lakhs for construction of houses granted to all categories of borrowers except to the employees of the banks.
  28. 28. 28 ii. loans up to Rs 50,0001- for repairs to damaged houses granted to all categories of borrowers except to the employees of the banks. (b) Indirect finance i. assistance given to any Governmental agency or to a non-governmental agency. Approved by the National Housing Bank (NHB) for provision of refinance for the purpose of constructing houses where the loan component does not exceed Rupees Three lakhs per housing unit. Assistance given to any governmental agency or to a non-governmental agency. Approved by NHB for provision of refinance for slum clearance and rehabilitation of slum dwellers where loan component does not exceed Rupees Three lakhs per housing unit. iii. subscription to bonds issued by NHB and Housing and Urban Development Corporation exclusively for financing of housing as defined under the priority sector. (for construction of houses where the loan component does not exceed Rupees Three lakhs per dwelling unit).
  29. 29. 29 8 Borrowers Belonging to Weaker Sections Taking Pure Consumption Loans Pure consumption loans granted under the consumption credit scheme is included , .9 Funds by Sponsor Banks to Regional Rural Bank The amount of funds provided by sponsor banks to RRB is treated as PSL of the sponsor banks. 50 per cent of the amount of refinance granted to RRB is treated as indirect finance to agriculture while 40 per cent is treated as advance to weaker sections, 10 Loans to Self Help Groups I Non-Governmental Organisations Loans provided by banks to Self Help Groups (SHG) and Non- Governmental Organisations or small groups which are in the process of forming into SHGs.
  30. 30. 30 Thrust Areas of Priority Sector Lending The edifice of the priority sector lending that has emerged in the period after the nationalization of banks in 1969 is based on the following pillars. 1. The system of priority sector lending has envisaged setting up of targets and sub-targets for financing of specific sectors. The share of priority sectors in total banks advances is 40 percent. Sub targets for agriculture and weaker sections are fixed at 18 percent and 10 percent of total advances respectively. 2. The interest rate policy under priority sector and non priority sector has been stipulated. Concessional rates of interest for the priority sector advances and relatively higher rate of interest for other sectors have been special features. This is known as cross subsidization policy. Here the losses arising on concessional loans are met out of the profits from other loans. This has facilitated flow of credit to the
  31. 31. 31 weaker sections of the society and neglected sections of the economy at relatively lower rates of interest. 3. Financing of loan accounts under priority sector may entail risk of default. Hence a separate insurance scheme guaranteeing a part of the loan of commercial banks was introduced in 1970 and the DICGC of India was established. The Corporation also provides deposit insurance to the depositors up to a prescribed limit. The Corporation operates various credit guarantee schemes relating to guarantee support to eligible credit institutions for 4 their priority sector advances to small borrowers and small scale industries. 4. Priority sector lending implies deliberate diversion of funds of the banks from the other sectors and that too at lower interest. To mitigate the ill effects of this on bank resources and on profitability the schemes of refinance were formulated by NABARD in particular. Its advances about 42% to 45% of the ground level rural credit disbursed by banks.
  32. 32. 32 Need for Priority Sector Lending The objectives underlying the priority sector lending relate to ensuring the assistance from the banking system flows in an increasing measure to those sectors of the economy which though contributing significant proportion of national product have not received adequate support of institutional finance in the past. This inter-alia implied flow of required funds to various sectors of the economy in accordance with the national planned priorities. The social control on banks was imposed as a measure to employ prudently and socially desirable channels with the objective of achieving economic growth combined with stability and social justice. Even decades after independence, more than 70 percent of borrowing by cultivators was from informal sector. Lending from commercial banks was directed towards large industrial houses. Agricultural sector, small scale industries and weaker sections were more neglected because of both risk factor and urban bias. Although co- operative sector was there to serve the needs of agricultural sector it was unable to meet the credit demand of farm community. There was
  33. 33. 33 a need for ensuring an equitable and purposeful distribution of credit keeping in view relative priorities of developmental needs.
  34. 34. 34 Changing Criteria of Priority Sectors In the post nationalization of 14 commercial banks in 1969 period the Reserve Bank of India was compelled to lay down targets for lending to specified sectors. Each major bank was given targets for lending to these sectors. A more comprehensive definition of priority sector was adopted in 1977. These were mainly in terms of sectors. It was realized in the early 1980s that even within priority sectors credit flow was more to the affluent sections. So the concept of weaker section was adopted within priority sector. It was categorically stated that the maximum benefit should be available to these weaker sections. By 1980s definition and quantitative targets had fully crystallized. There emerged the political interference to make use of these developments for vote bank politics for misuse of credit. As a result neither banking institutions nor the neglected sectors and sections were benefited. Thus the priority sector lending was effected. Financial sector reform became imperative. Thus the Narashimhan Committee 5 suggested for bringing down the priority sector target from 40 percent to 10 percent. This was not accepted by the Government.
  35. 35. 35 Interest Rate Structure on PSL The interest rates are administered by RBI and not subjected to market forces of supply and demand. The rates are different for different schemes. These interest rates also undergo periodic changes. The interest rate applicable to the PSL is concessional and related to the credit limits up to Rs.250001- . The rates range from 10 to 12 per cent in the case of short term agricultural loans. About 75 per cent of farm advances are in the credit limit up to Rs.25000. The rates charged on advances for units engaged in seed and other input distribution range between 1 ,S per cent and 14 per cent, rates on small scale industries range between 10 per cent and 16 per cent (over Rs.25 lakhs limits) and for other priority sector categories from 12.5 per cent to 15 per cent. The rate of interest is 10 per cent for the advances under Government sponsored credit linked programmes such as IRDP, PMRY in specified backward areas and 12 per cent in other areas. New structure of lending rates for scheduled commercial banks linking interest rates to the size of the loans for all sectors has been introduced with effect from
  36. 36. 36 analysis of NPA in priority sector lending comparative study on public sector bank and private sector bank 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 organized Lending market or could not afford to pay the interest at the commercial rate. This type of lending is called Priority Sector Lending. This paper examines the NPA in Priority Sector Lending and a comparative study is done between Public sector banks and private sector banks. The study analyzed priority sector to find out the percentage share of NPA of components of priority sector lending, to study whether there is significant difference between NPA of SBI &Associates, Old Private Banks and New Private Banks with the NPA of Nationalized Banks, the benchmark Category, and to find out the significant impact of Priority Sector Lending on the Total NPA of Banks using tools Like
  37. 37. 37 regression analysis and ratio analysis. The result showed the significant impact of priority sector lending on Total NPA of Public Sector banks, whereas in case of Private Sector Banks, there was no significant impact of priority sector lending on total NPA of Banks. Also the result showed the significant difference between NPA of SBI & Associates, Old Private Banks and New Private Banks with the NPA of Nationalized Banks, the benchmark Category.
  38. 38. 38 The following graph represents the distribution of NPA in Priority Sector among its components. The NPA in Priority Sector was Rs. 24156 crores in 2001and Rs. 25286 crores in 2008.
  39. 39. 39 RBI widens scope for priority sector lending, hikes MSME credit limit The Reserve Bank today announced three changes to the priority sector lending norms and more than doubled the limit for MSME advances to the services sector to Rs 5 crore. In its annual policy statement, the RBI proposed an increase in the loan limit for micro and small enterprises in the services sector to Rs 5 crore per borrower from Rs 2 crore earlier. Similarly, the regulator also suggested an increase in loan limit to Rs 5 crore from the earlier Rs 1 crore in case of lending to dealers/sellers of fertilisers, pesticides, seeds, cattle and poultry feeds, agricultural implements and other inputs which are classified as indirect finance to the agriculture sector. The reclassifications of the priority sector lending (PSL) regime have been done based on the feedback received from stakeholders regarding enhancement in certain loan limits to be classified as PSL advances “within the broad contours of the priority sector architecture,” the apex bank said.
  40. 40. 40 RBI Governor D Subbarao said detailed guidelines for the same will be issued shortly. The policy statement also proposed to raise the limit on pledged loans to Rs 50 lakh from the current Rs 25 lakh as direct agricultural lending in the case of individual farmers and as indirect agriculture loans in the case of corporates, partnership firms and institutions engaged in agriculture and allied activities.
  41. 41. 41 RBI changes rules on priority sector lending The Reserve Bank of India (RBI) on Wednesday amended its guidelines on so-called priority sector lending to encourage commercial banks to undertake more direct lending to farmers. RBI has included loans to corporations including farmers’ producer companies of individual farmers and cooperatives of farmers directly engaged in agriculture and allied activities under direct lending. Such loans can be short-term crop loans, loans for pre-harvest and post- harvest activities, and credit to farmers for exporting their own farm produce. Also, bank loans to certain operations of micro and small enterprises, and loans to government agencies for construction of dwelling units and slum rehabilitation can also be termed priority sector, RBI said. Under priority sector norms, banks need to set aside 40% of their total credit to agriculture, exports, micro lending and other weak economic sections. Failure to meet this target will force banks to invest in the Rural Infrastructure Development Fund maintained by the National Bank for Agriculture and Rural
  42. 42. 42 Development. The changes will come into effect from 20 July, RBI said in a notification. “The central bank is in favour of more direct lending by banks to the agriculture sector as farmers directly benefit from such lending and monitoring the end use is easier,” a senior official with a state-run bank said on condition of anonymity.
  43. 43. 43 Include export credit in priority sector lending for all banks To give a boost to the export sector, an internal committee of the Reserve Bank of India (RBI) has recommended that export credit be included in priority sector lending for all banks. At present, only foreign banks are required to disburse 12% of their total credit under priority sector to export companies. For all other banks, export finance is outside the 40% priority sector mandate. The RBI formed a technical committee earlier this year to study the issues of exporters in relation to accessing bank finance, cost and procedural impediments and recommend ways to smooth credit flow to the sector. The committee's report was released by the central bank on Monday. The committee, chaired by executive director G Padmanabhan, has recommended that this inclusion be done for 3-5 years and, then, be reviewed. "Alternatively, the committee suggests inclusion of export credit as an eligible sector for deployment of 50% of the respective bank's shortfall in priority sector," the panel said. The RBI had increased the amount of outstanding export credit that
  44. 44. 44 banks can get refinanced to 50% recently. The committee has recommended the relaxation be kept for three years. Further, to make foreign exchange available to banks that extend export finance, the RBI has a swap facility wherein banks buy dollars from the central bank and sell the same at a forward date to support pre-shipment export credit. The scheme comes up for review in June and the committee has recommended its continuation for at least three years. Another recommendation is to remove foreign currency borrowings, exchange earners foreign currency and foreign currency non-resident deposits from the calculation of cash reserve ratio and statutory liquidity ratio for banks. This would reduce the cost burden for banks while lending to exporters, the committee said. The report says that the government can exempt foreign currency borrowings of exporters from withholding tax to reduce their cost.
  45. 45. 45 LENDING TO PRIORITY SECTOR- Reserve bank of India 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
  46. 46. 46 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.
  47. 47. 47 . 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 in manufacture, processing or preservation of goods and whose investment in plant and machinery (original
  48. 48. 48 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 other service enterprises as per the definition given in Section I and other enterprises that are engaged in providing or rendering of services, and whose investment in equipment does not exceed the amount specified in Section I, appended. (iv) Micro Credit : Provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower 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, will constitute micro credit.
  49. 49. 49 (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 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. (2) 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 respective categories of priority sector (direct or indirect) depending on the underlying assets, provided the securitised assets are originated by banks and financial institutions and fulfil the Reserve Bank of India guidelines on securitisation
  50. 50. 50 (3) 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) or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher, as on March 31 of the previous year. (4) 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 targets would not be eligible for classification as indirect finance to agriculture/SSI, as the case may be. II. TARGETS/SUB-TARGETS The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below Domestic commercial banks Foreign banks
  51. 51. 51 Total Priority Sector Advances 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent Amount of Off- Balance Sheet Exposure, whichever is higher. 32 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is Higher. Total agricultural advance 18 per cent of ANBC or credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher. Of this, indirect lending in excess of 4.5% of ANBC or credit equivalent amount of Off- Balance Sheet No target
  52. 52. 52 Exposure, whichever is higher, will not be reckoned for computing performance under 18 per cent target. However, all agricultural advances under the categories 'direct' and 'indirect' will be reckoned in computing performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of Off-
  53. 53. 53 Balance Sheet Exposure, whichever is higher SSI advances Advances to SSI sector will be reckoned in computing performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. 10 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is Higher Micro enterprises within SSI (i) 40 per cent of total SSI advances should go to units having investment in plant Same as for domestic banks.
  54. 54. 54 and machinery up to Rs 5 lakh, (ii) 20 per cent of total SSI advances should go to units with investment in plant & machinery between Rs 5 lakh and Rs. 25 lakh (Thus, 60 per cent of SSI advances should go to the micro enterprises). Export credit Export credit is not a part of priority sector for domestic commercial banks. 12 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Advances to 10 per cent of ANBC No target.
  55. 55. 55 weaker sections or credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher. Differential Rate of Interest Scheme 1 per cent of total advances outstanding as at the end of the previous Year. It should be ensured that not less than 40 per cent of the total advances granted under DRI scheme go to scheduled Caste/scheduled tribes. At least two third of DRI advances should be No target.
  56. 56. 56 Granted through rural and semi-urban branches. [ANBC or credit equivalent of Off-Balance Sheet Exposures denotes the outstanding as on March 31 of the previous year. For this purpose, outstanding FCNR (B) and NRNR deposits balances will no longer be deducted for computation of NBC for priority sector lending purposes. For the purpose of priority sector lending, Adjusted NBC (ANBC) denotes NBC plus investments made by banks in non-SLR bonds held in HTM category.] The detailed guidelines in this regard are given hereunder SECTION I 1. AGRICULTURE 1DIRECT FINANCE Finance to individual Farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers] for Agriculture and Allied Activities
  57. 57. 57 1 Short-term loans for raising crops, i.e. for crop loans. This will include traditional/nontraditional plantations and horticulture. 2 Advances up to Rs. 10 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not. .3 Working capital and term loans for financing production and investment requirements for agriculture and allied activities. 4 Loans to small and marginal farmers for purchase of land for agricultural purposes. .5 Loans to distressed farmers indebted to non-institutional lenders, against appropriate collateral or group security. .6 Loans granted for pre-harvest and post-harvest activities such as spraying, weeding, harvesting, grading, sorting, processing and
  58. 58. 58 transporting undertaken by rural and semi urban households or groups/cooperatives of rural and semi-urban households. 1.2 Finance to others up to an aggregate amount of Rs. 20 lakh per borrower for the purposes INDIRECT FINANCE Finance for Agriculture and Allied Activities .1 Loans to entities covered less than 1.2 above in excess of Rs. 20 lakh in aggregate per borrower for agriculture and allied activities. In such cases, the entire amount outstanding shall be treated as indirect finance for agriculture. .2 Loans to food and agro-based processing units with investments in plant and machinery up to Rs. 10 crore, undertaken by other than rural and semi-urban households. .3 Loans to Non-Banking Financial Companies (NBFCs) for on lending to individual farmers.
  59. 59. 59 .4 (i) Credit for purchase and distribution of fertilisers, pesticides, seeds, etc. (ii) Loans up to Rs. 40 lakh granted for purchase and distribution of inputs for the allied Activities such as cattle feed, poultry feed, etc. .5 Finance for setting up of Agriclinics and Agribusiness Centres. .6 Finance for hire-purchase schemes for distribution of agricultural machinery and implements. .7 Loans to farmers through Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS). 8 Loans to cooperative societies of farmers for disposing of the produce of members. .9 Financing the farmers indirectly through the co-operative system (otherwise than by subscription to bonds and debenture issues)
  60. 60. 60 provided a certificate from the State Cooperative Bank/State Cooperative Agriculture and Rural Development Bank (SCARDB), as the case may be, is produced, certifying the end use of such loans. 10 Investments by banks in special bonds issued by NABARD with the objective of financing Exclusively agriculture/allied activities (not eligible for classification under priority sector lending with effect from April 1, 2007) . 11 Loans for construction and running of storage facilities (warehouse, market yards, god owns, and silos), including cold storage units designed to store agriculture produce/products, irrespective of their location. If the storage unit is registered as SSI unit, the loans granted to such units may be classified under advances to SSI, provided the investment in plant and machinery is within the stipulated ceiling. . 12 Advances to Customs Service Units managed by individuals, institutions or organizations who maintain a fleet of tractors,
  61. 61. 61 bulldozers, well-boring equipment, threshers, combines, etc., and undertake work for farmers on contract basis. 13 Finance extended to dealers in drip irrigation/sprinkler irrigation system/agricultural machinery, irrespective of their location, subject to the following conditions: (a) The dealer 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. (b) A ceiling of up to Rs. 30 lakh per dealer should be observed. .14 Loans to Arthias (commission agents in rural/semi-urban areas functioning in markets/mandies) for extending credit to farmers, for supply of inputs as also for buying the output from the individual farmers/ SHGs/ JLGs. 15 Fifty per cent of the credit outstanding under loans for general purposes under General Credit Cards (GCC).
  62. 62. 62 2 SMALL SCALE INDUSTRIES DIRECT FINANCE 2.1 Direct Finance in the small scale industry sector will include credit to: 1 Small Scale Industries Units engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) excluding land and building does not exceed Rs. 5 crore. 2 Micro Enterprises Small scale units whose investment in plant and machinery (original cost) excluding land and building is up to Rs. 25 lakh, irrespective of the location of the unit, are treated as Micro Enterprises. 3 KVI Sector
  63. 63. 63 All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery. Such advances will be eligible for consideration under the sub-target (60 per cent) of the SSI segment within the priority sector. INDIRECT FINANCE 2.2 Indirect finance in the small-scale industrial sector will include credit to: 1 Persons involved in assisting the decentralised sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries. 2 Advances to cooperatives of producers in the decentralised sector viz. artisans village and Cottage industries. 3 Subscription to bonds issued by NABARD with the objective of financing exclusively nonfarm sector (not eligible for classification under priority sector lending with effect from April 1, 2007).
  64. 64. 64 4 Loans granted by banks to NBFCs for on lending to SSI sector. 3. SMALL BUSINESS / SERVICE ENTERPRISES 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. (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. 2 Loans to NBFCs for the purpose of on-lending to various categories of small business and service enterprises.
  65. 65. 65 4. MICRO CREDIT 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, forenabling them to improve their living standards. 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.
  66. 66. 66 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 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. 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. 3 Assistance up to Rs. 1.25 lakh per housing unit given to any governmental agency/ nongovernmental agency (approved by the
  67. 67. 67 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 Saharan Rozgar Yojana (SJSRY).
  68. 68. 68 (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. . Export Credit This category will form part of priority sector for foreign banks only. SECTION II PENALTIES FOR NON-ACHIEVEMENT OF PRIORITY SECTOR LENDING TARGET / SUBTARGETS 1. Domestic scheduled commercial banks – Contribution by banks to Rural Infrastructure Development Fund (RIDF): 9 Domestic scheduled commercial banks having shortfall in lending to priority sector target (40)
  69. 69. 69 Per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher) and / or agriculture target (18 per cent of ANBC or credit equivalent amount of OffBalance Sheet Exposure, whichever is higher) shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD. The concerned banks will be called upon by NABARD, on receiving demands from various State Governments, to contribute to RIDF. .2 The corpus of a particular tranche of RIDF is decided by Government of India every year. Fifty per cent of the corpus shall be allocated among the domestic commercial banks having shortfall in lending to priority sector target of 40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, on a pro-rata basis, and fifty per cent of the corpus shall be allocated among the banks having shortfall in lending to agriculture target of 18 per cent of ANBC or credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher, on a pro-rata basis. The amount of contribution by banks to a particular tranche of RIDF will be decided in the beginning of the financial year.
  70. 70. 70 .3 The interest rates on banks’ contribution to RIDF shall be fixed by Reserve Bank of India from time to time. 1 Details regarding operationalisation of the RIDF such as the amounts to be deposited by banks, interest rates on deposits, period of deposits etc., will be communicated to the concerned banks separately by August of each year to enable them to plan their deployment of funds. 2. Foreign Banks – Deposit by Foreign Banks with SIDBI 1 The foreign banks having shortfall in lending to stipulated priority sector target/sub-targets will be required to contribute to Small Enterprises Development Fund (SEDF) to be set up by Small Industries Development Bank of India (SIDBI). 2 The corpus of SEDF shall be decided by Reserve Bank of India on a year to year basis. The tenor of the deposits shall be for a period of three years or as decided by Reserve Bank from time to time. Fifty per
  71. 71. 71 cent of the corpus shall be contributed by foreign banks having shortfall in lending to priority sector target of 32 per cent of ANBC or credit equivalent amount of OffBalance Sheet Exposure, whichever is higher, on a pro-rata basis, and fifty per cent of the corpus shall be contributed by foreign banks having aggregate shortfall in lending to SSI sector and export sector of 10 per cent and 12 per cent respectively, of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, on a pro-rata basis. .3 The concerned foreign banks will be called upon by SIDBI, as and when required by them, to contribute to SEDF, after giving one month’s notice. 4 The interest rates on foreign banks’ contribution to SEDF shall be fixed by the Reserve Bank
  72. 72. 72 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 10 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 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
  73. 73. 73 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, arunning 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. .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
  74. 74. 74 within 4 weeks, provided the loan applications are complete in all respects and are accompanied by a 'check list'. .4 Rejection of Proposals .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.
  75. 75. 75 4 REPAYMENT SCHEDULE 1 Repayment programme should be fixed taking into account the sustenance requirements, surplus generating capacity, the break- even point, the life of the asset, etc., and not in an "ad hoc" manner. In respect of composite loans, repayment schedule may be fixed for term loan component only. .2 As the repaying capacity of the people affected by natural calamities gets severely impaired due to the damage to the economic pursuits and loss of economic assets, the benefits such asrestructuring of existing loans, etc. as envisaged under our circular. 5 RATES OF INTEREST .1 The rates of interest on various categories of priority sector advances will be as per RBI directives issued from time to time. (a) In respect of direct agricultural advances, banks should not compound the interest in the case of current dues, i.e. crop loans and
  76. 76. 76 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 the 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 over dues 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
  77. 77. 77 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 .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 .1 No service charges/inspection charges should be levied on priority sector loans up to Rs.25,000/-. .2 For loans above Rs. 25,000/- banks will be free to prescribe service charges with the prior approval of their Boards.
  78. 78. 78 8. INSURANCE AGAINST FIRE AND OTHER RISKS 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 (b) Advances to SSI sector up to and inclusive of Rs. 25,000/- by way of - • Composite Fire Fire Fire Equipment and current Assets Equipment Current Assets
  79. 79. 79 loans to artisans, village and cottage industries Fire Equipment and current assets • All term loans Fire Equipment •Working capital where these are against non- hazardous goods
  80. 80. 80 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 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
  81. 81. 81 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.
  82. 82. 82 BIBLIOGRAPHY WEBSITES:-  www.wikipedia.com  www.vault.com  www.investopedia.com  www.answers.com  www.bcg.com  www.bloonnet.com  www.vccircle.com

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