Much awaited Reserve Bank of India guidelines to harmonise various instructions issued to Commercial Banks, SFBs, RRBs, UCBs and LABs; align these guidelines with emerging national priorities and bring sharper focus on inclusive development and also aim to encourage and support environment friendly lending policies to achieve Sustainable Development Goals (SDGs) have been issued in RBI website as under on 31st May 2021.
Let us elucidate ourselves with the latest RBI instructions to all banks on priority sector advances.
The provisions of these Directions shall apply to every Commercial Bank [including Regional Rural Bank (RRB), Small Finance Bank (SFB), Local Area Bank] and Primary (Urban) Co-operative Bank (UCB) other than Salary Earners’ Bank licensed to operate in India by the Reserve Bank of India.
4 chapters with 41 pages under 29 headings with 4 ANNEX and one appendix adorn the guidelines which need to be strictly followed by relevant entities mentioned in the above communication.
These instructions are called as” Master Directions – Priority Sector Lending (PSL) – Targets and Classification (Updated as on May 31, 2021)”
As an ex- banker who tinkered with RRBs setting up and management from a corporate office of one giant nationalized bank , I can safely give my observations over the growth of priority sector advances by banks over the past 5 decades.
What is a priority sector?
The following constitute priority sector advances by commercial banks and others.
ii. Micro, Small and Medium Enterprises
iii. Export Credit
vi. Social Infrastructure
vii. Renewable Energy
ANBC – Adjusted Net Bank Credit (ANBC) and Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) are used to explain targets/sub targets of PSL.
The targets and sub-targets set under priority sector lending, to be computed on the basis of the ANBC/ CEOBE as applicable as on the corresponding date of the preceding year, in case of commercial banks are as under:
For commercial banks targets (Domestic commercial banks (excl. RRBs & SFBs) & foreign banks with 20 branches and above)
How to remove regional disparities among districts?
To address regional disparities in the flow of priority sector credit at the district level, it has been decided to rank districts on the basis of per capita credit flow to priority sector and build an incentive framework for districts with comparatively lower flow of credit and a dis-incentive framework for districts with comparatively higher flow of priority sector credit.
Accordingly, from FY 2021-22 onwards, a higher weight (125%) would be assigned to the incremental priority sector credit in the identified districts where the credit flow is comparatively lower (per capita PSL less than ₹6000), and a lower weight (90%) would be assigned for incremental priority sector credit in the identified districts where the credit flow is comparatively higher (per capita PSL greater than ₹25,000).
The list of both categories of districts is given in Annex IA & IB. This list will be valid for a period up to FY 2023-24 and will be reviewed thereafter. The districts other than those mentioned in Annex IA and IB will continue to have existing weightage of 100%. A list of 205 districts have been shown under Annex IA while 184 districts fill up Annex 1B.
With the passing of Farm bills by parliament, the statement that the lending to agriculture sector will include Farm Credit (Agriculture and Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities carry lot of distinct interpretation to enhance prosperity under agriculture sector.
In view of above developments, the following information may be of interest to any one to make agriculture a success story.
Farm Credit – Corporate farmers, Farmer Producer Organisations (FPOs)/(FPC) Companies of Individual Farmers, Partnership firms and Co-operatives of farmers engaged in Agriculture and Allied Activities
(a) Loans for the following activities will be subject to an aggregate limit of ₹2 crore per borrowing entity:
Agriculture Infrastructure Loans for agriculture infrastructure will be subject to an aggregate sanctioned limit of ₹100 crore per borrower from the banking system. List of activities is furnished below:
1. Agriculture infrastructure: i) Loans for construction of storage facilities (warehouse, market yards, godowns and silos) including cold storage units/cold storage chains designed to store agriculture produce/products, irrespective of their location. ii) Soil conservation and watershed development. iii) Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and vermi composting. iv) Loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.
2. Ancillary activities: (i) Loans for setting up of Agri-clinics and Agri-business centres. (ii) 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. (iii) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi MultiPurpose Societies (LAMPS) for on-lending to agriculture. (iv) Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per the conditions specified in paragraph 21 of these Master Directions. (v) Loans sanctioned by banks to registered NBFCs (other than MFIs) as per conditions specified in paragraph 22 of these Master Directions.
3. My observation: Many states with dynamic agricultural policies have ventured out to encourage setting up of industries from above lists.
4. Sesame oil – cold pressed, coconut oil – cold pressed, organic items like rice, pulses or nuts newly and attractively packaged carry a good price which was unheard of in earlier times. New exhibitions held in places like Chennai, various places in Rajasta, Gujarat, Maharastra , Andhra Pradesh or Uttara Pradesh stand testimony to the new policies under agriculture.
Following loans under ancillary services will be subject to limits prescribed as under:
i. Loans up to ₹5 crore to co-operative societies of farmers for purchase of the produce of members (Not applicable to UCBs)
ii. Loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.
iii. Loans for Food and Agro-processing up to an aggregate sanctioned limit of ₹100 crore per borrower from the banking system.
Under annexure 3, Indicative list of Permissible Activities under Food Processing Sector as shared by Ministry of Food Processing Industries (MoFPI) has been given. A list of 29 heads has been given. I have given below some of them to enlighten our intellect.
1. Cleaning, Air Cooling (Field Heat Removal), Sorting, Grading/Sizing, Packaging, Warehousing, Distribution of Fruits & Vegetables etc.
2. Transportation including in refrigerated van/Cold Chain infrastructure system Packaging and storage including techniques like Silo, Hermetic storage; pest management.
3. Storage at low temperature/Cold Storage/Modified/Controlled Atmosphere packaging, Refrigeration/Chilling etc.
4. Primary and/or Minimal Processing of F&V: – Blanching (Vegetables), Peeling, Cutting, Storage, Distribution at Low temperature, vacuum packaging etc.
5. Sun Drying and Mechanical Drying: – Solar Drying, Hot air drying, Dehydration, hybrid drying, fluidized bed drying, refractive window drying, drum drying, radio frequency drying, Lyophilisation (Freeze Drying), Vacuum Drying, Spray Drying, De-hydro-freezing etc.
6. Preservation through various methods; both traditional and modern.
7. Frozen Products: Individually Quick Frozen (10F) of Fruit, Vegetables, Meat, Fish, Sea Foods etc.
Khadi and Village Industries Sector (KVI)
All loans to units in the KVI sector will be eligible for classification under the subtarget of 7.5 percent prescribed for Micro Enterprises under priority sector.
Other Finance to MSMEs
(i) Loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME as per Para 9.
(ii) Loans to entities involved in assisting the decentralized sector in the supply of inputs and marketing of output of artisans, village and cottage industries.
Export Credit (not applicable to RRBs and LABs) Export credit under agriculture and MSME sectors are allowed to be classified as PSL in the respective categories viz. agriculture and MSME. Export Credit (other than in agriculture and MSME) will be allowed to be classified as priority sector.
Incremental export credit over corresponding date of the preceding year, up to 2 per cent of ANBC or CEOBE whichever is higher, subject to a sanctioned limit of up to ₹ 40 crore per borrower.
What is an export credit?
Export credit includes pre-shipment and post-shipment export credit (excluding off-balance sheet items) as defined in Master Circular on Rupee / Foreign Currency Export Credit and Customer Service to Exporters issued by Department of Regulation, RBI vide DBR No.DIR.BC.14/04.02.002/2015-16 dated July 1, 2015 and updated from time to time.
Will extending educational loan benefit banks under ps category?
Loans to individuals for educational purposes, including vocational courses, not exceeding ₹ 20 lakh will be considered as eligible for priority sector classification. Loans currently classified as priority sector will continue till maturity.
Bank loans to Housing sector as per limits prescribed below are eligible for priority sector classification: (i) Loans to individuals up to ₹35 lakh in metropolitan centres (with population of ten lakh and above) and up to ₹25 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹45 lakh and ₹30 lakh respectively. Existing individual housing loans of UCBs presently classified under PSL will continue as PSL till maturity or repayment.
12.2 Loans up to ₹10 lakh in metropolitan centres and up to ₹6 lakh in other centres for repairs to damaged dwelling units conforming to the overall cost of the dwelling unit as prescribed in para 12.1.
12.3 Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 sq.m.
12.4 Bank loans for affordable housing projects using at least 50% of FAR/FSI for dwelling units with carpet area of not more than 60 sq.m.
12.5 Bank loans to HFCs (approved by NHB for their refinance) for on-lending, up to ₹20 lakh for individual borrowers, for purchase/construction/ reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers,
The purpose of introducing housing under priority sector category has helped a large number of lower/middle class borrower to get housing loans on a timely manner with dignity. During my time as a banker, banks except HDFC, none gave loans for housing.
What about social infrastructure?
Bank loans to social infrastructure sector as per limits prescribed below are eligible for priority sector classification
Bank loans up to a limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc. and loans up to a limit of ₹10 crore per borrower for building heal care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. In case of UCBs, the above limits are applicable only in centres having a population of less than one lakh.
Now, the case of renewable energy under which category, our nation is breaking all boundaries to scale new heights. Yes, it is covered under priority sector category of financing by banks.
Bank loans up to a limit of ₹30 crore to borrowers for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities, viz., street lighting systems and remote village electrification etc., will be eligible for Priority Sector classification.
For individual households, the loan limit will be ₹10 lakh per borrower.
Loans not exceeding ₹1.00 lakh per borrower provided directly by banks to individuals and individual members of SHG/JLG, provided the individual borrower’s household annual income in rural areas does not exceed ₹1.00 lakh and for non-rural areas it does not exceed ₹1.60 lakh, and loans not exceeding ₹2.00 lakh provided directly by banks to SHG/JLG for activities other than agriculture or MSME, viz., loans for meeting social needs, construction or repair of house, construction of toilets or any viable common activity started by the SHGs.
Loans to distressed persons [other than distressed farmers indebted to noninstitutional lenders] not exceeding ₹1.00 lakh per borrower to prepay their debt to non-institutional lenders.
Nowadays, banks do finance NBFCs who specialize in financing under PS category since they know the art of recovery of lons on daily/weekly or at any time suitable for the borrower to repay.
What happens to bank finance under such category? Are they PS loans?
Bank loans to NBFCs for on-lending (not applicable to RRBs, UCBs, SFBs and LABs) Bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible for classification as priority sector under respective categories subject to the following conditions:
(i) Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture will be allowed up to ₹ 10 lakh per borrower.
(ii) Micro & Small enterprises: On-lending by NBFC will be allowed up to ₹ 20 lakh per borrower.
Bank loans to HFCs for on-lending (not applicable to RRBs, SFBs and LABs)
Bank credit 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 ₹20 lakh per borrower. Banks should maintain necessary borrower-wise details of the underlying portfolio.
Cap on On-lending Bank credit to NBFCs (including HFCs) for on-lending as applicable in para 22 and 23 above, will be allowed up to an overall limit of five percent of individual bank’s total priority sector lending. Banks shall compute the eligible portfolio under onlending mechanism by averaging across four quarters, to determine adherence to the prescribed cap.(Kindly refer para 22 and 23 for guidance from original RBI communication)
What about COVID 19 Measures for PSL
Who will monitor the PSL of banks on a quarterly basis?
Monitoring of Priority Sector Lending targets To ensure continuous flow of credit to priority sector, the compliance of banks will be monitored on ‘quarterly’ basis. The data on priority sector advances is required to be furnished by banks to FIDD, Central Office at quarterly and annual intervals as per the reporting format (quarterly and annual).
Non-achievement of Priority Sector targets (i) Banks having any shortfall in lending to priority sector shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other funds with NABARD/NHB/SIDBI/ MUDRA Ltd., as decided by the Reserve Bank from time to time.
While computing priority sector target achievement, shortfall / excess lending for each quarter will be monitored separately. A simple average of all quarters will be arrived at and considered for computation of overall shortfall / excess at the end of the year. The same method will be followed for calculating the achievement of priority sector sub-targets. (Illustration given in Annex IV).
Some of the common guidelines for all banks from RBI
What are the common guidelines issued by RBI?
(i) Rate of interest: The rates of interest on bank loans will be as per directives issued by Department of Regulation (DoR), RBI from time to time.
(ii) Service charges: No loan related and ad hoc service charges/inspection charges should be levied on priority sector loans up to ₹25,000. In the case of eligible priority sector loans to SHGs/ JLGs, this limit will be applicable per member and not to the group as a whole.
(iii) Receipt, Sanction/Rejection/Disbursement Register: A register/ electronic record should be maintained by the bank wherein the date of receipt, sanction/rejection/disbursement with reasons thereof, etc. should be recorded. The register/electronic record should be made available to all inspecting agencies.
(iv) Issue of acknowledgement of loan applications: Banks should provide acknowledgement for loan applications received under priority sector loans. Bank Boards should prescribe a time limit within which the bank communicates its decision in writing to the applicants.
It was once fashionable to talk of commercial banking as banking dealing with traders, manufacturers and much later to exporters with complete security of immovable assets and or company stocks on highly depreciated basis. With nationalization of banks and with the trust exihibited by the common man on banks even to the extent of blindly believing that once a nationalized bank, it will secure his/her financial interest at all circumstances and at all cost. The whole political system believes in this philosophy. This blind faith coupled with massive saving of money by a common man with the private/public sector banks made the regulatory authorities or the government authorities to think outside the box approach and make priority sector lending as compulsory and the results over the past 46 years have justified the faith of common citizen.
Hence, I have the great privilege of extensively quoting RBI master directions on priority sector advances for educational purposes. It is a common knowledge among bankers that their corporates would read this master circular by RBI thoroughly for strict implementation which ultimately help them to get new clients in all unconventional fields for their proper growth.
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