India’s central bank has announced several changes in the loans that will now be considered ‘priority sector’, making administering such loans easier for banks. But bankers said that the move wouldn’t increase their focus on these sectors which was already above the requirement in many cases. Banks are required to lend 40% of their advances to certain segments such as agriculture, small business, retail traders, professionals and self-employed individuals. These loans are termed ‘priority sector loans’.
According to the revised guidelines, housing loans of up to Rs20 lakh to individuals for purchase or construction of a house (that they will live in) will now be classified under priority-sector lending. The earlier limit was up to Rs5 lakh for direct lending in rural areas and Rs15 lakh in semi-urban and metropolitan areas. While this move is directed at making finance accessible to people who currently do not have access to it, bankers said that they are already doing their best as far as priority-sector lending is concerned and the new norms will not give them any more headroom in a situation where the Reserve Bank of India (RBI) is keeping a close eye on liquidity.
In an effort to stem inflation, which was at 6.09% for the first week of April, RBI has put in place several measures focused on reducing the degree of liquidity in the system.
The latest move makes it easier for banks to administer priority-sector loans. In the annual monetary policy for 2007-08, announced last week, RBI cut the risk weightage on home loans up to Rs20 lakh to 50% from 75%. This essentially means that for every Rs100 worth of loans, banks are now required to have a capital of Rs4.50, down from Rs6.75 (banks have a capital-adequacy ratio of 9% and this is multiplied with the risk weightage to arrive at the amount of capital they need to have).
By bringing in home loans up to Rs20 lakh under the priority sector, RBI has removed administrative hassles for banks, said K.C. Chakraborty, chairman and managing director, Indian Bank.
According to the revised norms, education loans up to Rs10 lakh for studies in India and up to Rs20 lakh for studies abroad will also come under the priority sector, and those up to Rs50,000 would qualify under microcredit. Loans to retail traders not exceeding Rs20 lakh would also qualify as priority-sector lending.
The total priority-sector target remains unchanged at 40% of total bank credit but from now on, it will be linked to adjusted net bank credit. The adjustment will be done by adding the net bank credit to the investments made by banks in corporate bonds.
RBI has also said that investments by banks in inter-bank participation certificates on a risk-sharing basis shall be eligible for classification under priority sector, provided they are held for at least 180 days. Inter-bank participation certificates are a form of securitization of loans through which a bank buys the assets of another bank for a stipulated period that can vary between 90 and 180 days. Following the new norms, a bank that is unable to meet the directed-lending target of 40% can make up by buying out loans disbursed by other banks for 180 days. Until now, a bank falling short in meeting the target was required to keep funds in the form of deposits with National Bank For Agriculture and Rural Development (Nabard) and the Small Industries Development Bank of India (Sidbi), which in turn used this money to support farmers and small-scale industries.
But Jogesh Agarwal, joint managing director of State Bank of India, the country’s largest bank, said that the new guidelines will not help the banking sector much. “Banks are already doing their best in priority-sector lending. Most of the public-sector banks are in fact lending much more than 40%,” he said.