RBI overhauls priority sector lending targets | Mint
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Business News/ Industry / RBI overhauls priority sector lending targets
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RBI overhauls priority sector lending targets

The central bank broadbases priority sector, adds medium enterprises, social infrastructure and renewable energy

As per the new RBI classification, banks have to lend 8% of their credit to small and marginal farmers. They will also have to lend 7.5% of their loans to the micro enterprises. Photo: MintPremium
As per the new RBI classification, banks have to lend 8% of their credit to small and marginal farmers. They will also have to lend 7.5% of their loans to the micro enterprises. Photo: Mint

Mumbai: Micro enterprises and small and marginal farmers will have to be given at least 8% of the loans extended by banks, the Reserve Bank of India (RBI) directed on Thursday while recasting its rules for priority sector lending.

The central bank said foreign banks with less than 20 branches will also have to lend 40% of their net credit to the priority sector like any other commercial bank in the country, but gave them time till the end of fiscal year 2020 to do so. This segment of the banking sector was earlier exempted from this rule.

Broadbasing the priority sector, RBI added three more categories into the fold—medium enterprises, social infrastructure and renewable energy—in addition to the existing ones, which include agriculture, micro and small enterprises, export credit, education, and certain categories of housing.

Banks have to lend 8% of their credit to small and marginal farmers, defined as farmers having less than two hectares of land. They will also have to lend 7.5% of their loans to the micro enterprises, entities whose investment in plant and machinery does not exceed 25 lakh.

To achieve these targets, RBI will release guidelines for priority sector lending certificates, which will be eligible for classification under priority sector provided the assets are originated by banks.

The guidelines give banks some leeway to achieve their priority sector targets, said Shinjini Kumar, executive director and leader, banking and capital market, at consultancy firm PricewaterhouseCoopers.

“The decision to do away with the distinction between direct and indirect agriculture is a positive. Also, RBI has broadened the priority sectors to include new areas like renewable energy and social infrastructure. Foreign banks with less than 20 branches have also been allowed to include export credit up to 32% of their priority sector which will make it easier for them to achieve their target," Kumar said.

“Our experience shows that the vulnerable sections of society, small and marginal farmers as well as micro enterprises, do not get bank credit. Of course, they were included in the definition of priority sector, but there was no target and thus banks did not always bothered lending to them. Now they will have to," said M.V. Nair, former chairman of Union Bank of India and head of a committee on priority sector lending that first advocated such changes.

Nair said the priority sector certificates, which was also suggested by the committee, will be a game changer because banks can now easily meet the targets without having the infrastructure to do that. Banks that have the infrastructure to lend to the priority sector can over-lend their targets, only to offload their liabilities by selling these certificates.

To prod banks to take the targets seriously, RBI said it will assess the non-achievement of lending norms every quarter at the end of year from 2016-17 instead of annual basis as at present.

The broadbasing of the definition is not surprising given the increasing corporatization of agriculture, said Ananda Bhoumik, senior director and head of financial institutions at India Ratings & Research.

“In the last 10 years, the ticket sizes of agriculture loans have increased. It is no longer like a retail loan, but more of a corporate loan with big ticket size. Hence, broadbasing the definition makes sense to include the entire ecosystem," Bhoumik said.

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Published: 23 Apr 2015, 09:41 PM IST
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