RBI panel on priority loans focuses on small farmers, food processing, education

In a bid to help the smallest farmers and businesses access bank finance, a panel set up by the RBI has recommended that foreign banks priority lending should be at the rate of 40%, same as that of Indian banks. It has also suggested focussed lending to small farmers and micro-enterprises who are excluded from formal financial channels.

The panel has suggested making food and agro-based processing with an initial investment in plant and machinery up to R20 crore eligible for loans under priority sector and that there be no ceiling for loans for units that process perishable agriculture produce. The move will boost processing levels in India, now extremely low at around 6% compared with over 30% in most Asian and Latin American developing countries.

The committee, set up by the Reserve Bank of India (RBI) and headed by MV Nair, chairman, Union Bank of India, has also suggested that agriculture...and allied activities be clubbed within the priority sector, removing the distinction between direct and indirect agriculture lending. “The target for agriculture and allied activities is recommended at 18% of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposure (CEOBE), whichever is higher,” the committee observed. The committee also suggests loans to construct or buy a dwelling up to R25 lakh and loans of up to R2 lakh in rural and semi urban areas and up to R5 lakh in other centres for repairs be given under the priority sector.

The committee report notes that small and marginal farmers constituting more than 80% of total farmer households in the country face exclusion from formal financial channels.

“Therefore, a sub-target for small and marginal farmers within agriculture and allied activities is recommended, equivalent to 9% of ANBC or CEOBE, whichever is higher to be achieved in stages by 2015-16,” the...committee says. It also believes banks should ensure that the number of outstanding beneficiary accounts register a minimum annual growth rate of 15%. Moreover, it has called for a sub-target for micro enterprises of 7% of ANBC or CEOBE, whichever is higher to be achieved in stages by 2013-14. This would be within micro and small enterprises (MSE) covering almost 26 million units across the country. Here too, banks would be “encouraged to ensure that the number of outstanding beneficiary accounts register a minimum annual growth rate of 15%.”

Stressing the importance of agriculture and small scale sectors and their potential to generate employment, the committee suggested that domestic scheduled commercial banks continue to lend 40% of their ANBC or CEOBE, whichever is higher, to the priority sector. “The need for directed lending in India would continue, considering there is lack of access to credit for a vast segment of...the society,” the committee says.

The limit for loans for studies in India, the commmittee feels, should be increased to Rs 15 lakh while for studies overseas, it should go up to Rs 25 lakh, from the existing limits of Rs 10 lakh and Rs 20 lakh respectively. The committee believes that the Differential Rate of Interest (DRI) scheme has become obsolete and should be scrapped.

Foreign banks, the report says, “are expected to comply with priority sector target or sub-targets as applicable to domestic banks”. As such, priority sector target for foreign banks will be 40% of ANBC or CEOBE, whichever is higher with sub-targets of 15% for exports, 15% for the MSE sector, within which 7% will be to micro enterprises. “However, foreign banks operating in India as locally incorporated wholly-owned subsidiary of parent bank would be required to meet the priority sector lending requirements on par with domestic scheduled...commercial banks,” the committee notes.

The objective of reaching out to a large number of small and marginal farmer households and micro-enterprises in defined time-frame, the committee says, may be supplemented by allowing bank loans to non-bank financial intermediaries for on-lending to specified segments to be reckoned for classification under priority sector, up to a maximum of 5% of ANBC or CEOBE, whichever is higher. Further, allowing non-tradable Priority Sector Lending Certificates (PSLCs), on a pilot basis, that can be only transacted between domestic scheduled commercial banks, foreign banks and RRBs, may lead to the development of a market for PSLCs, the committee feels. The committee was constituted by the RBI, following the announcement by the governor in the monetary policy statement 2011-12, to reexamine the existing classification and suggest revised guidelines with regard to priority sector lending and related issues....