Reserve Bank revises norms for priority sector lending

The Reserve Bank of India (RBI) has revamped priority sector lending (PSL) norms.

Details:

  • Now, loans to sectors such as
    1. Social infrastructure,
    2. Renewable energy
    3. Medium enterprises will also be treated as PSL.
  • The distinction between direct and indirect agriculture has been done away with. This means banks can meet their entire agriculture lending target – 18% of their net loans disbursed in the previous year – by funding to indirect agriculture, which includes loans to companies engaged in the agriculture sector.
  • Loans to build agriculture infrastructure such as
    • Storage,
    • Soil conservation development
    • Watershed development, will now be considered as farm lending.
  • Loans for ancillary activities such as setting up agro clinics and agribusiness centres will also be part of farm lending.
  • In the renewable energy segment, bank loans of up to Rs 15 crore for solar-based power generators, biomass-based power generators, wind mills, micro-hydel plants, etc, will be considered part of PSL.
  • For individual households, the loan limit will be Rs 10,00,000 a borrower.
  • On the home finance front, loans of up to Rs 28 lakh to individuals in metropolitan centres and up to Rs 20 lakh in other centres will qualify as PSL, provided the overall cost of the dwelling unit is Rs 35 lakh in the metropolitan centres and Rs 25 lakh in other centres.
  • Bank advances to microfinance institutions (MFIs) for lending to individuals, members of self-help groups and joint liability groups will also qualify as PSL, provided the MFIs meet the norms prescribed for micro lending (loan pricing, amount, etc).
  • Direct agriculture refers to individual farmers or groups directly engaged in agriculture and allied activities.

Now, food and agro processing units will form part of agriculture.

PRIORITY SECTOR LENDING:

  • Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture or small scale industries.
  • This is essentially meant for an all round development of the economy as opposed to focusing only on the financial sector.
  • Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

What is meant by Priority Sector?

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation.

CATEGORIES OF PRIORITY SECTOR:

  1. Agriculture
  2. Micro and Small Enterprises
  3. Education (educational loans granted to individuals by banks)
  4. Housing
  5. Export Credit
  6. State sponsored organizations for Scheduled Castes/Scheduled Tribes
  7. Consumption loans (under the consumption credit scheme for weaker sections)
  8. Loans to the software industry (having credit limit not exceeding Rs 1 crore from the banking system)

Minimum Limits:

40% lending Public or Private Bank
32% lending Foreign Bank

  • The limits are prescribed according to the ownership pattern of banks. While for local banks, both the public and private sectors have to lend 40 % of their net bank credit, or NBC, to the priority sector as defined by RBI, foreign banks (with 20 branches) have to lend 32% of their NBC to the priority sector.

Specific targets within the priority sector:

  • Domestic banks have to lend % of NBC (Net Bank Credit)
    • 18 % to agriculture
    • 10 % of the NBC to weaker section.
  • Foreign banks have to lend % of NBC (Net bank Credit)
    • 10 % of NBC to the small-scale industries
    • 12 % of their NBC as export credit.
  • The rate of interest on various priority sector loans will be as per RBI’s directives issued from time to time, which is linked to Base Rate of banks at present.
  • Priority  sector guidelines do not lay down any preferential rate of interest for priority sector loans.

Sources: The Hindu, PIB, Wiki.

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