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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.
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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.
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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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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)
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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.
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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 .
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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
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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
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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
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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-
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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
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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
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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,
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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.
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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.
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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)
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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.
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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.
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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
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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
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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.
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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.
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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
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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".
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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
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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.
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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).
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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.
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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
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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.
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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
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a need for ensuring an equitable and purposeful distribution of credit
keeping in view relative priorities of developmental needs.
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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.
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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
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
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
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
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
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
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
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
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
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
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
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
.
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
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
(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
(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
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
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
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
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
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
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
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
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
.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
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
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
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
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
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
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
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
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
(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
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
.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
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
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
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
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
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
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
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
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
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
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
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.
