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Mumbai: Foreign banks with more than 20 branches in India will have to channel 40% of their lending to the priority sector, which includes agriculture and small and medium businesses, in five years, the Reserve Bank of India (RBI) said on Friday.

The Nair panel had suggested that such banks be given a time frame of five years, starting 1 April 2013, to adhere to the norms, and the targets be increased in a phased manner in the interim. The proportion of priority sector lending for foreign banks with fewer than 20 branches will stay at 32%, RBI said on its website. Foreign banks will need to submit a plan for achieving the targets over a specific timeframe to be approved by RBI, the central bank said.

Overseas banks with more than 20 branches in India include Standard Chartered Plc, HSBC Holdings Plc and Citibank NA.

Besides agriculture and allied activities and small businesses, the sector includes housing loans for the poor, student loans and loans to other low-income groups. RBI said banks should lend directly to the sector and not through intermediaries such as non-banking financial companies and housing finance companies.

These firms lend to the weaker sections of the society and later sell their loan portfolios to banks, freeing the latter from the obligation of meeting priority sector targets.

In the revised norms, the targets for both direct and indirect agricultural lending have been kept unchanged at 13.5% and 4.5%, respectively, of bank credit. The Nair panel originally had recommended eliminating the distinction between direct and indirect agricultural lending and introducing a special category of small and marginal farmers.

“Probably RBI thought this distinction will be hard to follow for foreign banks," said a senior banker—a member of the Nair panel—who did not want to be named.

RBI also expanded the scope of activities in the sector by including loans to micro and small service enterprises of up to 1 crore and all loans to micro and small manufacturing enterprises. Loans of up to 25 lakh for housing in metropolitan centres and 15 lakh in other centres, loans for housing projects exclusively for economically weaker sections and low-income groups costing up to 5 lakh per unit will count as priority sector lending.

anup.r@livemint.com

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