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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.

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.

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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.

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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)

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.

5

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.

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 Introduction2 History and Backgrounds of Priority sector lending3 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

6Analysis 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:

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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

measures for enhancing productivity, employment and economic

growth with social justice (Narasimham, 1994).

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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.,

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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

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).

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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

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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

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

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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

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

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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.

Targets of 40, 18 and 10 percent of net bank credit for total priority

sector credit, sub targets of agricultural and weaker sections

respectively remain same in bot the periods.

Targets of 12 percent of export credit and 10 percent of SSI credit

have been introduced for the foreign banks which were not there

earlier even for domestic banks.

In the pre-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.

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In the post reform period ceiling of short term credit to be

considered under priority sector has been increased to Rs. 1 lakh.

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.

Indirect finance to agriculture was not a part of priority 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.

Inclusion of food and agro processing in the priority sector will give

impetus and boost up the production of food crops.

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Scope of small business under priority sector has been expanded

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.

Professionals like accountants and solicitors are included in

priority sector. These are not employment generating activities. They

do not belong to weaker sections either.

Transport and road network are included in priority sector.

Housing was earlier exclusively for very poor segments. Now the

ceilings up to Rs. 5 lakhs which can very well cover requirements of

middle class people even in urban areas.

Education loan is considered under 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.

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a) Agriculture (direct and indirect)

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)

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i) Housing loan (direct and indirect) up to Rs. 50,000.

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:

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a) small and marginal farmers with land holding of less than 5 acres

or landless laborers’, tenants and share croppers.

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

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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

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

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Distribution of fertilisers, pesticides and seeds, loans to Electricity

Boards, loans to fanners through Primary Agricultural Credit

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

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a) agencies involved in assisting the decentralised sector in the

supply of inputs and marketing of output of artisans, village and

cottage industries.

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.

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g) Loans for setting up of Industrial Estates.

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

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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

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

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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

qualified medical practitioners setting up practice In semi-urban and

rural areas, the borrowing limits should not exceed Rupees 10 lakhs

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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.

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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

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.

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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.

Need for Priority Sector Lending

36

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

a need for ensuring an equitable and purposeful distribution of credit

keeping in view relative priorities of developmental needs.

37

38

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

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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

regression analysis and ratio analysis. The result showed the significant impact of

41

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.

42

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.

43

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.

44

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.

45

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.

46

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

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.

47

Include export credit in priority

sector lending for all banks

48

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

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

49

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.

LENDING TO PRIORITY SECTOR- Reserve

bank of India

50

At a meeting of the National Credit Council held in July 1968, it was

emphasised that commercial banks should increase their involvement

in the financing of priority sectors, viz., agriculture and small scale

industries. The description of the priority sectors was later formalised

in 1972 on the basis of the report submitted by the Informal Study

Group on Statistics relating to advances to the Priority Sectors

constituted by the Reserve Bank in May 1971. On the basis of this

report, the Reserve Bank prescribed a modified return for reporting

priority sector advances and certain guidelines were issued in this

connection indicating the scope of the items to be included under the

various categories of priority sector. Although initially there was no

specific target fixed in respect of priority sector lending, in November

1974 the banks were advised to raise the share of these sectors in

their aggregate advances to the level of 33 1/3 per cent by March

1979. At a meeting of the Union Finance Minister with the Chief

Executive Officers of public sector banks held in March 1980, it was

agreed that banks should aim at raising the proportion of their

advances to priority sectors to 40 per cent by March 1985.

Subsequently, on the basis of the recommendations of the Working

Group on the Modalities of Implementation of Priority Sector Lending

51

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.

.

I. CATEGORIES OF PRIORITY SECTOR

52

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.

53

(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

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.

54

(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.

(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.

55

(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

(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.

56

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

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.

No target

57

Of this, indirect

lending in excess of

4.5% of ANBC or

credit equivalent

amount of Off-

Balance Sheet

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

58

the overall

priority sector target

of 40 per cent of

ANBC or credit

equivalent

amount of Off-

Balance Sheet

Exposure, whichever

is higher

59

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

and machinery up to

Rs 5 lakh,

(ii) 20 per cent of total

Same as for domestic

banks.

60

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).

61

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

weaker

sections

10 per cent of ANBC

or credit equivalent

amount of Off-

Balance Sheet

Exposure, whichever

is higher.

No target.

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

No target.

62

the total

advances granted

under DRI scheme go

to scheduled

Caste/scheduled

tribes. At least two

third of DRI advances

should be

Granted through rural

and semi-urban

branches.

63

[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

1 Short-term loans for raising crops, i.e. for crop loans. This will

include traditional/nontraditional plantations and horticulture.

64

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

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

65

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.

.4 (i) Credit for purchase and distribution of fertilisers, pesticides,

seeds, etc.

66

(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)

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.

67

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,

bulldozers, well-boring equipment, threshers, combines, etc., and

undertake work for farmers on contract basis.

68

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).

2 SMALL SCALE INDUSTRIES

69

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

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.

70

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).

4 Loans granted by banks to NBFCs for on lending to SSI sector.

3. SMALL BUSINESS / SERVICE ENTERPRISES

71

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.

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.

72

2 Loans to urban poor indebted to informal sector

Loans to distressed urban poor to prepay their debt to lenders in the

informal sector would be eligible for classification under priority

sector. Urban poor for this purpose may include those families in the

urban areas who are below the poverty line. Such loans to urban poor

may be classified under weaker sections within the priority sector.

5. STATE SPONSORED ORGANIZATIONS FOR SCHEDULED

CASTES/SCHEDULED

TRIBES 8 Advances sanctioned to State Sponsored Organisations for

Scheduled Castes/ Scheduled Tribes for the specific purpose of

purchase and supply of inputs to and/or the marketing of the outputs

of the beneficiaries of these organisations.

6. EDUCATION

Educational loans should include only loans and advances granted

to individuals for educational purposes up to Rs. 10 lakh for studies

in India and Rs. 20 lakh for studies abroad, and not those granted to

institutions.

73

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

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.

74

(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).

(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.

75

. 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)

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.

76

.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.

.3 The interest rates on banks’ contribution to RIDF shall be fixed by

Reserve Bank of India from time to time.

77

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).

78

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

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

79

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.

80

.2 Issue of Acknowledgement of Loan Applications

Banks should give acknowledgement for loan applications received

from weaker sections. Towards this purpose, it may be ensured that

all loan application forms have perforated portion for

acknowledgement to be completed and issued by the receiving

branch. Each branch may affix on the main application form as well as

the corresponding portion for acknowledgement, 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.

81

(ii) All loan applications for SSI up to a credit limit of Rs. 25,000/-

should be disposed of within 2 weeks and those up to Rs. 5 lakh

within 4 weeks, provided the loan applications are complete in all

respects and are accompanied by a 'check list'.

.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

82

With a view to providing farmers wider choice as also eliminating

undesirable practices, banks may disburse all loans for agricultural

purposes in cash which will facilitate dealer choice to borrowers and

foster an environment of trust. However, banks may continue the

practice of obtaining receipts from borrowers.

4 REPAYMENT SCHEDULE

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

83

.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

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.

84

(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

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.

85

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.

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 Fire Equipment and

86

SSI sector up to

and inclusive

of Rs. 25,000/-

by way of -

• Composite

loans to

artisans, village

and cottage

industries

Fire Equipment

and current

assets

• All term loans

Fire Equipment

•Working

capital where

these are

against non-

Fire

Fire

current

Assets

Equipment

Current Assets

87

hazardous

goods

88

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

89

All Branch Managers of banks should be vested with discretionary

powers to sanction proposals

From weaker sections without reference to any higher authority. If

there are difficulties in extending such discretionary powers to all the

Branch Managers, such powers should exist at least at the district

level and arrangements be ensured that credit proposals on weaker

sections are cleared promptly.

11 MACHINERY TO LOOK INTO COMPLAINTS

There should be machinery at the regional offices to entertain

complaints from the borrowers If the branches do not follow these

guidelines, and to verify periodically that these guidelines are

scrupulously implemented by the branches.

12 AMENDMENTS

These guidelines are subject to any instructions that may be issued

by the RBI from time to time.

90

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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