CHAPTER 3 CONCEPTUAL FRAMEWORK

Transcription

1 CHAPTER 3 CONCEPTUAL FRAMEWORK 3.1 Overview of Banking Sector in India Lending by Commercial Banks in India Priority Sector Lending by Commercial Banks in India The meaning of the term Priority Sector Features of Priority Sector Lending Genesis and Evolution of Priority Sector Lending Targets Prescribed by Reserve Bank of India for Lending to Various Priority Sectors Composition & Classification of Priority Sector Non Achievement of Priority Sector Lending Targets Common Guidelines for Priority Sector Loans 62 37

2 3.1 Overview Of Banking Sector In India : The banking sector is the lifeline of any modern economy. It is one of the important financial pillars of the financial system, which plays a vital role in the success/failure of an economy. Banks are one of the oldest financial intermediaries in the financial system. They play an important role in the mobilization of deposits and disbursement of credit to various sectors of the economy. Research confirms that countries with a well developed banking system grow faster than those with a weaker one. The strength of economy of any country basically hinges on the strength and efficiency of the financial system, in turn, depends on a sound and solvent banking system. A sound banking system efficiently deploys mobilized savings in productive sectors and a solvent banking system ensures that the bank is capable of meeting its obligation to the depositors. The banking sector is dominant in India as it accounts for more than half the assets of the financial sector. The importance of commercial banks in the process of economic development has been emphasized by the economic thinkers and progressive bankers in the country. Banks lending, investing and related activities facilitate the economic processes of production, distribution and consumption. Section 5(1) (b) of the Banking Regulation Act defines banking as the accepting, for the purpose of lending or investment, of deposits of money for the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Section 5(1) (c) defines banking company as any company which transacts the business of banking in India. (1) Functions Of A Bank As compared to ancient times, besides performing basic two functions of accepting deposits and lending money, now a days, banks provide a wide range of services. To play successfully and effectively in the present competitive environment where the banks face the threat of competition not only from the domestic banks but from the foreign banks also as a result of the 38

3 liberalization, privatization and globalization process, it is very necessary for the banks to broaden the horizons of their functioning. The activities of commercial banking have grown in multi-dimensional manner as well as multi-directional ways. Banks have been performing significantly in backward area development, rural development, also helping agriculture, industry and international trade. In a way, banks have emerged as the key financial agencies for rapid economic development. Banks have started providing variety of services and also performing number of functions which can be summarized as under : 1. Acceptance Of Deposits From The Public 2. Lending Of Money 3. Buying And Selling Of Securities 4. Payment And Collection Work 5. Acting As Trustee, Executor And Administrator 6. Collection Of Bills, Cheques, Other Instruments 7. Remittance Of Funds 8. Ancillary Services 9. Merchant Banking, Leasing, Hire-Purchase And Factoring Scheduled Banking Structure In India (1) The banking structure in India at present comprises of Commercial Banks and Cooperative Banks. There is further sub categorization of both the types of banks. The schedule banking structure in India can be described as under : 39

4 SCHEDULED BANKS IN INDIA Commercial Banks Cooperative Banks Urban Cooperative State Cooperative Public Sector Banks Private Sector Banks Foreign Banks in India Regional Rural Banks Nationalized Banks State Bank of India and its Associates Old Private Banks New Private Banks Different types of banks are functioning in India at present with a wide spread network of branches in India and abroad. Initially only public sector banks were dominantly operating in India since nationalization phase I, II and III in the years 1955, 1959 & 1969 respectively. In 1975, Regional Rural Banks and in 1994, new Private sector banks entered the banking sector. Further, with liberalization and economic reforms, Foreign Banks were also allowed to operate in India. During the last 30 years since nationalization tremendous changes have taken place in the financial markets as well as in the banking industry due to financial sector reforms. The banks have shed their traditional functions and have been innovating, improving and coming out with new types of services to cater emerging needs of their customers. Banks have been given greater freedom to frame their own policies. Rapid advancement of technology has contributed to significant reduction in transaction costs, facilitated greater diversification of portfolio and improvements in credit delivery of banks. 40

5 3.2 Lending By Commercial Banks In India Commercial banks provide funds or finance or loans or credits or advances, whatever term is used, to the individuals as well as business entities known as borrowers to fulfil gaps in their financial requirements for different purposes. The borrower has to repay such loans in instalments within a certain period as specified by the lending bank. Banks recovers a certain charge i.e. interest and other charges from the borrowers in consideration of providing funds and related services/ facilities to them. Thus, banks earn interest as well as non interest income from lending. Income from advances constitutes a huge portion of banks total income. Therefore, it is inevitable for banks to minutely observe that loans are adequately secured, timely repayment of loan and interest thereon is ensured as well as deployment of fund is made to productive avenues because default in any of these areas may harm flow of income, and thereby profitability, liquidity and overall worth of a bank Need for Bank Credit Credit provided by commercial banks is an important driver of national economy. A phenomenal growth in bank credit has been responsible behind the growth of industry in our country. Most of commercial credit was directly provided to the production sector that fuelled the growth of manufacturing industries in India. The most important determinants of the modern economy are the consumption demands of the vast population as well as the supply mechanism to meet the demand. Today, the total output of our industrial and non industrial sectors is very large, the finance requirement of which cannot possibly be met by traditional financiers alone. The role of modern commercial banks as providers of credit to the economy begins at this point. Commercial banks serve as intermediates between the savers (who provide deposits to banks) and the ultimate users of money (borrowers individuals as well as business entities). Banks facilitates upliftment of living standard of people as well as industrial development by providing funds to fulfill their financial requirements. 41

6 3.2.2 Cardinal Principles of Lending There are three cardinal principles of lending that commercial banks follow while taking a decision to provide credit. These are the principles of safety, liquidity and profitability. i)safety : The most important is to ensure the safety of the funds lent. It means that the borrower must repay the loan amount with interest as per the loan agreement. The ability to repay the loan depends upon the borrower s capacity and willingness to repay. The lending banker must ensure safety of the funds by ensuring adequacy and quality of the assets charged as securities against the loan. ii)liquidity : Commercial banks have traditionally been short term lenders. Therefore, a significant proportion of banks credit is directed towards working capital finance. An unusual proportion of long term loans may lead to an asset-liability mismatch and in turn a may results into liquidity crisis. iii) Profitability : Banks are commercial organizations with a mandate to earn profit. Banks provide credit to earn income in the form of interests and charges. Out of this income banks meet their operational expenditure, pay interest to depositors and pay dividends to shareholders. Banks should be careful that the funds are being deployed to the profitable avenues. However, on the other hand safety and liquidity of funds should also be ensured. Therefore, usually banks do not grant loans for unproductive and speculative purposes. In order to ensure all these three principles of safely, liquidity and profitability as well as in order to diversify risk component, banks should observe that credit portfolio is adequately diversified among different trades, industries and among different customers and areas. 42

7 3.2.3 Types of Bank Credit Now a days, banks provide a wide range of products and services in order to fulfil increasing demands of the deposit holders as well as borrowers. There has been a remarkable shift from traditional banking to modern banking. Commercial banks in India, offers diversified credit portfolio to satisfy banking and financial requirements of different segments of the economy. Banks provide credit to a number of segments and sub segments of retail as well as industrial sectors of the economy. Bank credits can be broadly classified into the following categories: a) Retail Credit : The term Retail Credit refers to the small denomination loans provided to a larger mass of people or customers for consumption, investment or production purposes. Retail credits are the loans provided to consumption segments like housing finance, personal and mortgage loans, education loans, loans for financing consumer durables, loans against fixed deposits, shares, securities, gold loans etc. Almost all commercial banks including PSBs, foreign and private sector banks are relying heavily on retail credit to expand their business and boost their profitability. The major factors that have contributed towards a significant growth in the retail credit segment of India commercial banks are decline in growth in corporate sector lending by banks, lower and diversified risk in retail lending, development of technology, improved standard of living of the people, decline in interest rates, simple procedures, easy accessibility and repayment etc. 43

8 b) Commercial Loans : Banks also provide credit to business entities and industries to facilitate industrial growth and development of the nation. These are the Micro, Small and Medium Enterprises (MSMEs) as well as heavy industries. These loans are provided to manufacturing enterprises engaged in manufacture/production, processing or preservation of good and also these loans are provided to service enterprises engaged in providing or rendering of services. Commercial loans mainly are provided for financing working capital requirement of the business as well as to acquire or construction of fixed assets for the purpose of carrying on the business. Generally, working capital loans are the short term loans with tenor from one year to three years, provided to meet recurring expenditure like purchase of raw materials, to make payment to the suppliers, to meet production and operational expenses of the business etc. to ensure liquidity of funds for smooth running of the business. Term loans are the loans having longer tenor and to be repaid within five to seven years. Banks provide term loans for acquisition and/or construction of fixed assets for business purpose like purchase of plant & machinery, construction of factory building, acquiring shops or premises for business etc. Presently a wide range of loan products are being offered by commercial banks to meet the finance requirement of different business segments. These products are designed considering various needs of different types of business in order to encourage entrepreneurship and industrial expansion in the economy. Government of India has also from time to time undertaken various measures for growth and development of MSMEs as these segment contributes to the GDP of the nation to high extent. 44

9 c) Priority Sector Lending : The term Priority Sector refers to those sectors of the economy which, though viable and creditworthy, may not get timely and adequate credit in the absence of this special recognition. These include small value loans to farmers for agriculture and allied activities, to micro and small enterprises, to poor people for housing, to students for education and to other low income groups and weaker sections. The other groups/sectors which are able to get timely and adequate credit (without a special dispensation) do not qualify for priority sector status. (2) The Reserve Bank of India vide its master circulars has stipulated specific targets and categorisation as regards to the dispensation of credit to the priority sectors. The concept of priority sector lending by commercial banks in India has been discussed in detail in this chapter separately. d) Infrastructure Finance : The infrastructure sector covers various segments of the economy providing basic amenities to the people such as power, roads, highways, bridges, ports, airports, railways, water supply, sanitation and sewerage system, telecommunication, social and commercial infrastructure like education institutions, hospitals, tourism facilities, industrial parks or any other public facility of a similar nature. Financing infrastructure projects involve a large outlay of funds and an extended period of repayment. Banks finance infrastructure sector in various ways viz. i)direct financing instruments like rupee term loans, ii)deferred payment guarantees, iii)foreign currency loans etc, iv)by way of take out financing arrangement with IDFC/other financial institutions, v)by investing in infrastructure bonds issued by project promoters/dfis etc. 45

10 3.3 Priority Sector Lending By Commercial Banks In India The nationalisation of commercial banks in 1969 and 1982 made an attempt to shift the focus of commercial bank lending to a large extent. RBI propagated the concept of priority sector and laid down guidelines that every commercial bank would have to deliver credit to certain important sectors of the Indian economy. In order to ensure that these guidelines are met, RBI also stipulated a minimum level of credit to be delivered to these sectors. RBI has issued detailed guidelines for different types of banks regarding all aspects of priority sector lending like targets and sub targets for lending to different priority sectors, categories and sub categories of various sectors to be covered under priority sectors, norms for non achievement of targets by banks, procedure for application, sanction, rejection etc of such loans. However, the present study aims at studying the impact of lending to various priority sectors. Therefore, here the aspects related to the present study are discussed in detail whereas other aspects are narrated in brief providing an overview of the same Meaning of the term Priority Sector The term Priority Sector refers to those sectors of the economy which, though viable and creditworthy, may not get timely and adequate credit in the absence of this special recognition. These include small value loans to farmers for agriculture and allied activities, to micro and small enterprises, to poor people for housing, to students for education and to other low income groups and weaker sections. The other groups/sectors which are able to get timely and adequate credit (without a special dispensation) do not qualify for priority sector status. (5) 46

11 3.3.2 Features of Priority Sector Lending Priority Sector Lending is meant for the low income groups and weaker section of the economy. It is a part of normal commercial banking business operations. It must not be seen as a Corporate Social Responsibility function to be discharged by banks. Priority Sector Lending guidelines are applicable to all scheduled commercial banks operating in India viz. Public & Private sector banks, Regional Rural Banks (RRBs), Urban Cooperative Banks (UCBs), Foreign Banks etc. To facilitate banks, RBI has freed the pricing of most of credit facilities including those for those to priority sectors, so that individual banks can fix the pricing on the basis of level of risk perceived and their prudential judgement. Priority Sector Lending encourages Directed Credit. Banks should lend directly to the beneficiaries instead of routing these loans through intermediaries. This will ensure deployment of funds to the end users at reduced transaction cost. Priority Sector Lending ensures easier access to the bank credit to those beneficiaries who are otherwise not easily getting the same. Priority Sector Lending guidelines does not deny loans to non-priority sectors. Banks should provide credit to non priority sectors of the economy and should apply the usual techniques and risk analysis for grant of credit to such sectors. 47

12 3.3.3 Genesis And Evolution of Priority Sector Lending In India (3) The pivotal idea in priority sector lending is to ensure an equitable distribution of credit keeping in view the relative priorities of economic development needs of the nation. An enunciation of the need to channelize the flow of credit to certain sectors of the economy, known as the priority sectors, in the larger interests of the country, can be traced to the Reserve Bank's credit policy for the year In view of the severe imbalances which had developed in the economy in the preceding two years as a result of shortfalls in agricultural output and slowing down of industrial production, credit policy for the slack season 1967 was liberalized on a selective basis with a view, among other purposes, to enlarging the flow of credit to the priority sectors such as agriculture, exports and small-scale industries (SSI) (i) Social control over banks At around the same period, the Government of India initiated steps to institute social control over banks to remove certain deficiencies observed in the functioning of the banking system and to promote a purposive distribution of credit, consistent with the basic economic and social objectives. One of the deficiencies observed was that traditionally, the bulk of bank advances was directed to large and medium-scale industries, and big and established business houses, while agriculture, SSI and exports did not receive adequate attention. The measures for social control over banks, were therefore, initiated by the Government of India in with a view to securing a better adaptation of the banking system to the needs of economic planning and its playing a more active and positive role in aiding sectors like agriculture and SSI. The scheme of social control envisaged a purposive distribution of available lendable resources as well as a more effective mobilization of savings. At the second meeting of the National Credit Council held on July 24, 1968, it was emphasised that commercial banks should increase their involvement in 48

13 financing the priority sectors, viz., agriculture and SSI as a matter of urgency. The social control measures became formally effective in February (ii) Evolution Of The Concept Of Priority Sector Lending The nationalisation of the 14 major commercial banks in July 1969 led to a considerable reorientation of bank lending, especially to the priority sectors of the economy which had not previously received sufficient attention from the commercial banks. It gave an impetus to the process of reallocation of banking resources to suit the socio-economic needs of the country. Institutional credit facilities at reasonable rates of interest were extended to a large number of borrowers of small means such as small farmers, small-scale manufacturers, retail traders, road transport operators, small businessmen, professionals and self-employed persons, and also for education. One of the objectives of nationalisation of 14 major commercial banks was to ensure that no viable productive endeavour should suffer for lack of credit support, irrespective whether the borrower was big or small. Thus, the concept of priority sector lending was evolved further to ensure that assistance from the banking system flowed in an increasing measure to the vital sectors of the economy and according to national priorities. The priority sectors was formally described 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 Certain guidelines were issued in this connection in February 1972, indicating the scope of the items to be included under the various categories of priority sector (iii) History of Stipulations of Targets for Lending There has been a continuous upward revision in lending targets by RBI for various segments under priority sector. 49

14 Year November 1974 November 1978 March 1980 Targets Public Sector Banks were advised that their priority sector lending should reach a level of not less than 1/3 rd of the outstanding credit by March The private sector banks were advised to lend a minimum of 33 1/3 per cent of their total advances to the priority sectors by the end of March All domestic scheduled commercial banks were advised to raise the proportion of the priority sector advances from 33 1/3 per cent to 40 percent of aggregate advances by March Targets and sub-targets under the different priority sectors for different categories of banks have been reviewed and revised periodically. The subtarget for agriculture and allied activities was subsequently raised to : 15% by March % by March 1987, 17% by March 1989 and 18% by March (iv) Recommendations of Earlier Committees and Action Taken Several committees looked into the various aspects of priority sector lending. Major observations regarding directed credit by the committee during the phase of banking sector reforms are as under : In 1991, the Committee on the Financial System (Narasimham Committee-I) had observed that the directed credit programmes had played a useful purpose for extending the reach of the banking system to cover sectors, which were neglected hitherto. The Committee on Banking Sector Reforms (Narasimham Committee-II) (1998) again gave careful consideration to the issue of directed credit. It observed that, i) directed credit had led to an increase in non-performing loans and had adversely affected the efficiency and viability of banks. ii) 47 per cent of all NPAs emanated from the priority sector. 50

15 iii) a sudden reduction of priority sector targets could have the danger of a disruption in the flow of credit to these sectors. iv) the small and marginal farmers and the tiny sector of industry and small businesses have problems with regard to obtaining credit and some earmarking may be necessary for this sector. The Committee recommended that given the special needs of this sector, the current practice may continue. The Committee also proposed that given the importance and needs of employment oriented sectors (like food processing and related service activities in agriculture, fisheries, poultry and dairying), these sectors should also be covered under the scope of priority sector lending. The recommendations made by the working group led by Shri A Ghosh in 1982, were accepted by the Government of India and Reserve Bank of India and instructions were issued to banks in February The various segments which were classified by the above Group s report under priority sector were Agriculture (both direct and indirect finance), SSI, Small Road and Water Transport Operators, Retail Trade, Small Business, Professional and Self Employed Persons, State sponsored schemes for Scheduled Castes/Scheduled Tribes, Education, Housing and Consumption. The guidelines were revised in the year 2007 on the basis of the recommendations made by the C. S. Murthy Committee. Further, the Malegam Committee recommended a review of the priority sector lending guidelines. In August 2011, Reserve Bank of India set up a Committee led by Shri M. V. Nair to re-examine the existing classification and suggest revised guidelines with regard to Priority Sector lending classification and related issues. The recommendations of the committee were placed in the public domain inviting public comments. The recommendations of the Committee were examined based on the interface with various stakeholders and in the light of the comments / suggestions received from Government of India, banks, financial institutions, Non-Banking Financial Companies, Associations of industries, public and Indian Banks Association; and revised guidelines were issued on July 20, Thus, the revised guidelines are operational with effect from July 20,

16 3.3.4 Targets For Priority Sector Lending Prescribed By RBI As per extant guidelines by Reserve Bank of India, the targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are given below: (4) Categories Total Priority Sector Total agriculture Micro & Small Enterprises (MSE) Export Credit Advances to Weaker Sections Domestic commercial banks 40 percent of Adjusted Net Bank Credit [ANBC defined in sub paragraph (iii) below] or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. 18 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Advances to micro and small enterprises sector will be reckoned in computing achievement under the overall priority sector target of 40 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. (i) 40 percent of total advances to micro and small enterprises sector should go to Micro (manufacturing) enterprises having investment in plant and machinery up to 10 lakh and micro (service) enterprises having investment in equipment up to 4 lakh; (ii) 20 percent of total advances to micro and small enterprises sector should go to Micro (manufacturing) enterprises with investment in plant and machinery above 10 lakh and up to 25 lakh, and micro (service) enterprises with investment in equipment above 4 lakh and up to 10 lakh. Export credit is not a separate category. Export credit to eligible activities under agriculture and MSE will be reckoned for priority sector lending under respective categories. 10 percent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. 52

17 Computation of Adjusted Net Bank Credit Bank Credit in India (As prescribed in item No.VI of Form A (Special Return as on March 31 st ) under Section 42 (2) of the RBI Act, Bills Rediscounted with RBI and other approved Financial Institutions + Advances extended in India against the incremental FCNR (B)/NRE deposits, qualifying for exemption from CRR/SLR requirements, till their maturity. Net Bank Credit (NBC)* Bonds/debentures in Non-SLR categories under HTM category + other investments eligible to be treated as priority sector + Outstanding Deposits, as on preceding March 31 st, under RIDF, Warehouse Infrastructure Fund, Short term Co-operative Rural Credit Refinance Fund and Short Term RRB Fund with NABARD Adjusted Net Bank Credit (ANBC) I II III(I-II) IV III+IV * For the purpose of priority sector only. Banks should not deduct / net any amount like provisions, accrued interest, etc. from NBC. All types of loans, investments or any other item which are treated as eligible for classifications under priority sector target/sub-target achievement should also form part of Adjusted Net Bank Credit Composition And Classification Of Priority Sectors A number of different committees have been set up from time to time by Reserve Bank of India to study and review the concept of priority sector lending. Different committees have made different recommendations and accordingly actions have been taken thereon to further improvise lending to priority sector by banks. As a result of that targets and sub targets were revised several times as well as amendments made in categories to be included under priority sector which further widened the scope of the priority sector. At present, the priority sector broadly comprises of the following segments. (4) 53

18 Categories under priority sector (i) Agriculture (ii) Micro and Small Enterprises (iii) Education (iv) Housing (v) Export Credit (vi) Others (I) Description Of The Categories Under Priority Sector 1. AGRICULTURE 1.1 Direct Agriculture This includes loans to individual farmers including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture. (i) Short-term loans to farmers for raising crops, i.e. crop loans. This will include traditional/non-traditional plantations, horticulture and allied activities. (ii) Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and development loans for allied activities). (iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. (iv) Loans to farmers up to 50 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 or not. (v) Loans to small and marginal farmers for purchase of land for agricultural purposes. 54

19 (vi) Loans to distressed farmers indebted to non-institutional lenders. (vii) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) ceded to or managed/ controlled by such banks for on lending to farmers for agricultural and allied activities. (viii) Loans to farmers under Kisan Credit Card Scheme. (ix) Export credit to farmers for exporting their own farm produce. (x) Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage) up to an aggregate limit of 2 crore per borrower for the activities mentioned above in 1.1 (i), (ii), (iii) & (ix) Indirect agriculture This includes loans provided to corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture. If the aggregate loan limit per borrower is more than 2 crore the entire loan should be treated as indirect finance to agriculture. Loans up to 50 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 or not should be treated as indirect agriculture finance. Other indirect agriculture loans (i) Loans up to 5 crore per borrower to dealers /sellers of fertilizers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs for agriculture and allied activities. (ii) Loans for setting up of Agriclinics and Agribusiness Centres. 55

20 (iii) Loans up to 5 crore to cooperative societies of farmers for disposing of the produce of members. (iv) Loans to Custom Service Units managed by individuals, institutions or organizations who maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and undertake farm work for farmers on contract basis. (v) Loans for construction and running of storage facilities (warehouse, market yards, godowns and silos), including cold storage units designed to store agriculture produce/products, irrespective of their location. If the storage unit is a micro or small enterprise, such loans will be classified under loans to Micro and Small Enterprises sector. (vi) Loans to MFIs for on-lending to farmers for agricultural and allied (viii) Loans sanctioned to RRBs for on-lending to agriculture and allied activities. 2. MICRO AND SMALL ENTERPRISES For the purpose of categorisation under priority sector, the MSMED Act, 2006 has defined micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services as under : Manufacturing sector Enterprises Micro Enterprises Small Enterprises Service Sector Enterprises Micro Enterprises Small Enterprises Investment in plant and machinery Do not exceed twenty five lakh rupees More than twenty five lakh rupees but does not exceed five crore rupees Investment in equipment Does not exceed ten lakh rupees More than ten lakh rupees but does not exceed two crore rupees Bank loans to micro and small enterprises both manufacturing and service are eligible to be classified under priority sector. 56

21 Manufacturing enterprises are those engaged in the manufacture or production of goods to any industry specified by the Government from time to time. Service enterprises are the units engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006 (6). The following activities are categorised as services under Micro and Small (Service) Enterprises within the priority sector, provided such enterprises satisfy the investment criteria: (a) Consultancy Services including Management Services; (b) Composite Broker Services in Risk and Insurance Management; (c) Third Party Administration (TPA) Services for Medical Insurance Claims of Policy Holders; (d) Seed Grading Services; (e) Training-cum-Incubator Centre; (f) Educational Institutions; (g) Training Institutes; (h) Retail Trade; (i) Practice of Law, i.e. legal services; (j) Trading in medical instruments; (k) Placement and Management Consultancy Services; and (l) Advertising agency and Training centres Micro and Small Enterprises also includes, i) Small road & water transport operators, small business, retail trade, professional & self employed persons and other service enterprises. ii) Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investments criteria as prescribed. iii) All loans sanctioned to units in the Khadi and Village Industries (KVI) sector, irrespective of their size of operations, location and amount of 57

22 original investment in plant and machinery. Such loans are eligible for classification under the micro and small enterprises segment under priority sector. 3. EDUCATION Loans and advances granted to individuals for educational purposes including vocational courses upto 10 lakh for studies in India and 20 lakh for studies abroad should be included in the priority sector. 4. HOUSING Housing Loans provided by banks are included under priority sector provided they satisfy the following criteria : (i) Loans to individuals up to 25 lakh in metropolitan centres with population above ten lakh and 15 lakh in other centres for purchase/construction of a dwelling unit per family excluding loans sanctioned to bank s own employees. (ii) Loans for repairs to the damaged dwelling units of families up to 2 lakh in rural and semi- urban areas and up to 5 lakh in urban and metropolitan areas. (iii) Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of 10 lakh per dwelling unit. (iv) The loans sanctioned by banks for housing projects exclusively for the purpose of construction of houses only to economically weaker sections and low income groups, the total cost of which do not exceed 10 lakh per dwelling unit. For the purpose of identifying the economically weaker sections and low income groups, the family income limit of Rs.1.20 lacs per annum, irrespective of the location, is prescribed. (v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-lending for the purpose of purchase/ construction/ reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of 10 lakh per borrower. 58

23 5. EXPORT CREDIT Export credit will count towards the respective categories of priority sector, i.e. Agriculture and MSE sector. As regards the domestic banks and foreign banks with 20 and above branches, export credit is not a separate category under priority sector. Export Credit extended by foreign banks with less than 20 branches will be reckoned for priority sector target achievement. 6. OTHERS The following small values loans are also eligible to be categorised under priority sector : 6.1. Loans, upto Rs.50,000 per borrower provided directly by banks to individuals and their SHG/JLG, provided the borrower s household annual income in rural areas does not exceed 60,000/- and for non-rural areas it should not exceed 1,20,000/ Loans to distressed persons not exceeding 50,000 per borrower to prepay their debt to non-institutional lenders Overdrafts, up to 50,000 (per account), granted against basic banking / savings accounts provided the borrowers household annual income in rural areas does not exceed.60,000/- and for non-rural areas it should not exceed 1,20,000/ Loans 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 Loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-grid renewable energy solutions for households. 59

24 7. WEAKER SECTIONS Priority sector loans to the following borrowers will be considered under Weaker Sections category:- (a) Small and marginal farmers; (b) Artisans, village and cottage industries where individual credit limits do not exceed 50,000; (c) Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), now National Rural Livelihood Mission (NRLM); (d) Scheduled Castes and Scheduled Tribes; (e) Beneficiaries of Differential Rate of Interest (DRI) scheme; (f) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY); (g) Beneficiaries under the Scheme for Rehabilitation of Manual Scavengers (SRMS); (h) Loans to Self Help Groups; (i) Loans to distressed farmers indebted to non-institutional lenders; (j) Loans to distressed persons other than farmers not exceeding 50,000 per borrower to prepay their debt to non-institutional lenders; (k) Loans to individual women beneficiaries upto 50,000 per borrower; (l) Loans sanctioned under (a) to (k) above to persons from minority communities as may be notified by Government of India from time to time. (II) Investments By Banks In Securitised Assets Investments by banks in securitised assets, representing loans to various categories of priority sector, except 'others' category, are eligible for classification under respective categories of priority sector (direct or indirect) depending on the underlying assets provided that the securitised assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances prior to securitisation and fulfil the Reserve Bank of India guidelines on securitisation. 60

25 (III) Transfer Of Assets Through Direct Assignment /Outright Purchases Assignments/Outright purchases of pool of assets by banks representing loans under various categories of priority sector, except the 'others' category, will be eligible for classification under respective categories of priority sector (direct or indirect) provided the assets are originated by banks and financial institutions and are eligible to be classified as priority sector advances prior to the purchase and fulfil the Reserve Bank of India guidelines on outright purchase/assignment. (IV) Inter Bank Participation Certificates Bought By Banks Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk sharing basis, shall be eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorized under the respective categories of priority sector and the banks fulfil the Reserve Bank guidelines on IBPCs. (V) Bank Loans To MFIs For On-Lending Bank credit to Micro Finance Institutions extended on, or after, April 1, 2011 for on-lending to individuals and also to members of SHGs / JLGs will be eligible for categorisation as priority sector advance under respective categories viz., agriculture, micro and small enterprise, and 'others', as indirect finance, provided the banks fulfil the Reserve Bank guidelines on on-lending Non-Achievement Of Priority Sector Targets (7) All scheduled commercial banks having shortfall in lending to priority sector target/sub shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD/NHB/SIDBI/other Financial Institutions, as decided by the Reserve Bank from time to time. 61

26 Domestic scheduled commercial banks having shortfall in lending to priority target of 40% and/or agriculture lending target of 18% and/or weaker sections lending target 10%, shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD or Funds with other Financial Institutions, as specified by the Reserve Bank. Details regarding operationalization of the RIDF or any other Fund, 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 The foreign banks having shortfall in lending to stipulated priority sector lending target/sub-targets will be required to contribute to Funds to be set up with Small Industries Development Bank of India (SIDBI) or with other Financial Institutions, for such other purpose as may be stipulated by Reserve Bank of India from time to time. The interest rates on foreign banks contribution, period of deposits, etc. shall be fixed by Reserve Bank of India from time to time. Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes Common Guidelines For Priority Sector Advances (7) Banks should follow the following common guidelines prescribed by the Reserve Bank for all categories of advances under the priority sector. a) The Reserve Bank of India has prescribed specific guidelines regarding processing of loan applications, time frame for disposal/rejection of applications, maintaining registers, mode of disbursement, repayment schedule, rate of interest, service charges, penal interest for non repayment of such loans, provision of restructuring, insurance requirement for such loans etc. 62

27 b) Discretionary Powers 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. c) 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. The names and addresses of the officer with whom complaints can be lodged should be displayed on the notice board of every branch. d) Amendments These guidelines are subject to any instructions that may be issued by the RBI from time to time. e) Priority Sector-Data Reporting System The data on priority sector advances has to be furnished by banks as per the extant guidelines on reporting. References : 3. Pathak Bharati V., Indian Financial System, Person Education Pvt. Ltd., Indian Branch, Patparganj, Dr. D. D. Mukherjee, Credit Appraisal, Risk Analysis & Decision Making An Integrated Approach to on and off Balance Sheet Lending, Snow White Publications Pvt. Ltd., Mumbai, Draft Technical Paper By The Internal Working Group On Priority Sector Lending, September 2005, Reserve Bank Of India, Rural Planning And Credit Department Central Office, Mumbai. (source : 63

28 6. Master circular - Priority Sector Lending Targets and Classification, No.RBI/ /95 dt , Reserve Bank of India. (source : Notifications) 7. Master Circular Lending to Micro, Small & Medium Enterprises (MSME) Sector dt , Reserve Bank of India. (source : Notifications) 8. Master cir on Priority Sector Lending - Categorisation of Activities under Services under MSMED Act 2006, dt & , Reserve Bank of India. (source : Notifications) 9. Master Circular - Lending To Priority Sector, No.RBI/ /108 DT , Reserve Bank of India. (source : Notifications) 64