Priority Sector -- banks not reaching targets -- what they should do?
ET in the classroom: Priority-sector
lending
May 10, 2011, 06.07am IST
Tags:
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RIDF|
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NBC|
What is priority-sector
lending?
Banks were assigned a
special role in the economic development of the country, besides ensuring the
growth of the financial sector. The banking regulator, the Reserve Bank of
India, has hence prescribed that a portion of bank lending should be for
developmental activities, which it calls the priority sector.
Are there minimum limits?
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 have to lend
32% of their NBC to the priority sector.
What is net bank credit?
The net bank credit
should tally with the figure reported in the fortnightly return submitted under
Section 42 (2) of the Reserve Bank of India Act, 1934. However , outstanding
deposits under the FCNR (B) and NRNR schemes are excluded from net bank credit
for computation of priority sector lending target/subtargets.
Are there specific targets
within the priority sector?
Domestic banks have to
lend 18 % of NBC to agriculture and 10 % of the NBC has to be to the weaker
section. However, foreign banks have to lend 10 % of NBC to the small-scale
industries and 12 % of their NBC as export credit. However, for the balance, there
are a vast number of sectors that banks can lend as priority sector. The
Reserve Bank has a detailed note of what constitutes a priority sector, which
also includes housing loans, education loans and loans to MFIs, among others.
What has been the experience so
far?
It has been observed
that while banks often tend to meet the overall priority sector targets, they
sometimes tend to miss the sub-targets. This is particularly true in case of
domestic banks failing to meet their sub-targets for agricultural advances. One
of the reasons banks often site for not lending to this sector is that recovery
is often difficult.
Is there any penal action in
case of non-achievement of priority sector lending target by a bank?
Domestic banks having
a shortfall in lending to priority sector/ agriculture are allocated amounts
for contribution to the Rural Infrastructure Development Fund ( RIDF )
established in Nabard. In case of foreign banks operating in India, which fail
to achieve the priority sector lending target or sub-targets, an amount
equivalent to the shortfall is required to be deposited with Sidbi for one
year.
http://articles.economictimes.indiatimes.com/2011-05-10/news/29528246_1_priority-sector-priority-sector-lending-net-bank-credit
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