Reserve Bank of India: Priority Sector Lending Directions, 2020

Reserve Bank of India vides its Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2020 dated 4^th September 2020 issued a detailed circular, a mammoth exercise of consolidating 49 circulars/directions issued from 2007 till date. I am proud to write this article on this topic which keeps the course of RBI on the path of really uncared for categories of neglected sectors, before nationalization of banks, with detailed information enabling established norms for financing i. Agriculture ii. Micro, Small, and Medium Enterprises iii. Export Credit iv. Education v. Housing vi. Social Infrastructure vii. Renewable Energy viii. Others. Incidentally, my career started on this date in a commercial bank under this sector only.

Copy of massive circular is reproduced:

 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

Let us learn the tenets prescribed for availing credits from all types of banks under the sector titled “priority sector lending”. History recalls the nationalization of leading commercial banks in 1975 for committing banks to finance a neglected sector of financing, popularly titled priority sector lending, making it obligatory for banks to survive with the disbursement of finance. Yes, banks were forced to finance the sectors mentioned above with a percentage as part of their strategy or compulsion, as you would like to call.

What does the current direction say? (All information totally from the above directions except my observations based on nearly 48 years of the student of banking)

• “In exercise of the powers conferred by Sections 21 and 35A read with Section 56 of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the Directions.”
• Applicable to whom? 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.
• Definitions to learn: Credit Equivalent of Off-Balance Sheet Exposures (CEOBE): Adjusted Net Bank Credit (ANBC).
• What are the sectors under priority sector lending? The categories under the priority sector are as follows: i. Agriculture ii. Micro, Small, and Medium Enterprises iii. Export Credit iv. Education v. Housing vi. Social Infrastructure vii. Renewable Energy viii. Others. Detailed discussions will explain the meaning of every one of them, below.
• 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, are:
• Domestic commercial banks (excl. RRBs & SFBs) & foreign banks with 20 branches and above, 40 percent of ANBC as computed in para 6 below or CEOBE whichever is higher. Very important direction
• Is it the same for other types of banks too?
• Foreign banks with less than 20 branches: 40 percent of ANBC as computed in para 6 below or CEOBE whichever is higher; out of which up to 32% can be in the form of lending to Exports and not less than 8% can be to any other priority sector.
• Nowadays, more growth comes from rural areas as indicated by the recent pandemic or increase in economic activities due to developments in infrastructural activities. What about the limitations of financing for RRBs or other types of banks?
• Regional Rural Banks: 75 percent of ANBC as computed in para 6 below or CEOBE whichever is higher; However, lending to Medium Enterprises, Social Infrastructure, and Renewable Energy shall be reckoned for priority sector achievement only up to 15 percent of ANBC.
• Small Finance Banks: 75 percent of ANBC as computed in para 6 below or CEOBE whichever is higher.
• With the establishment of global supply chains, agriculture has taken a new role in development.
• Agriculture 18 percent of ANBC or CEOBE, whichever is higher; out of which a target of 10 percent# is prescribed for Small and Marginal Farmers (SMFs).
• Micro Enterprises 7.5 percent of ANBC or CEOBE, whichever is higher.
• Advances to Weaker Sections 12 percent# of ANBC or CEOBE, whichever is higher.

Now that we are comfortable with the availability of credit for various sectors of the economy and restrictions imposed on all types of banks, let me answer various relevant questions related to the latest developments that have raised the India’s position to the 48^th level in the International innovation index for 2020.

What about startups?

The answer is:

Other Finance to MSMEs (All young professionals in the startup industry must know this information)

(i) Loans up to ₹50 crores to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that conform 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. In respect of UCBs, the term “entities” shall not include institutions to which UCBs are not permitted to lend under the RBI guidelines / the legal framework governing their functioning.

(iii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries (Not applicable for UCBs)

(iv) Let us also know the additional information given by

(v) Let us also know the additional information given by

Let us also know the additional information given by RBI regarding the new initiatives taken under these directions:

“Revised PSL guidelines will enable better credit penetration to credit deficient areas; increase the lending to small and marginal farmers and weaker sections; boost credit to renewable energy, and health infrastructure.

Bank finance to start-ups (up to ₹50 crores); loans to farmers for installation of solar power plants for solarization of grid-connected agriculture pumps and loans for setting up Compressed Bio-Gas (CBG) plants have been included as fresh categories eligible for finance under priority sector. Some of the salient features of revised PSL guidelines are:

1. To address regional disparities in the flow of priority sector credit, higher weightage has been assigned to incremental priority sector credit in ‘identified districts’ where priority sector credit flow is comparatively low.

2. The targets prescribed for “small and marginal farmers” and “weaker sections” are being increased in a phased manner.

3. A higher credit limit has been specified for Farmers Producers Organizations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price.

4. Loan limits for renewable energy have been increased (doubled).

5. For improvement of health infrastructure, the credit limit for health infrastructure (including those under ‘Ayushman Bharat’) has been doubled.:

Let us calculate the lending available under renewable energy industrial units.

 Renewable Energy:

 Bank loans up to a limit of ₹30 crores to borrowers for purposes like solar-based power generators, biomass-based power generators, windmills, 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.

India has taken lead in financing industrial units that have ventured into this sector which needs land, manpower or state government mentoring.

I do expect bankers to read the instructions carefully and lend liberally.

Let us also look at credit limits for health care infrastructure.

• Bank loans to the social infrastructure sector as per limits prescribed below are eligible for priority sector classification 13.1. 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 the household level, etc. and loans up to a limit of ₹10 crores per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centers. In the case of UCBs, the above limits are applicable only in centers having a population of less than one lakh.
• Bank loans to MFIs extended for on-lending to individuals and also to members of SHGs/JLGs for water and sanitation facilities subject to the criteria laid down in paragraph 21 of these Master Directions.

List of Districts with comparatively high PSL credit;

A list of 26 states with 205 districts (Appendix 1A) is available for deeper study and guidance.

List of Districts with comparatively low PSL credit:

A list of 22 states with 184 districts (Appendix 1A) is available for deeper study and guidance.

What about export financing?

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 a priority sector as per the following information:

• Domestic banks / WoS of Foreign banks/ SFBs/ UCBs: Incremental export credit over the corresponding date of the preceding year, up to 2 percent of ANBC or CEOBE whichever is higher, subject to a sanctioned limit of up to ₹ 40 crores per borrower.
• Foreign banks with 20 branches and above: Incremental export credit over the corresponding date of the preceding year, up to 2 percent of ANBC or CEOBE whichever is higher.
• 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 the 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.

Classifying export financing under priority sector lending was a masterstroke and it helped India to grow into a massive export-oriented country.

One often hears what about financing Agriculture infrastructure development financing since with huge rural areas with virtual little development regarding infrastructure, the expected financing by banks has not happened. Or, one can say the demands have gone up.

Let us know the latest directions in this vital area since other countries like Thailand, China, Bangladesh, and Sri- Lanka have taken a lot of initiative to have the required infrastructure and compete with us.

“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 vermicomposting.

iv) Loans for construction of oil extraction/ processing units for production of biofuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio-Gas (CBG) plants.”

Let us discuss the application of lending currently undertaken in various states.

Uttar Pradesh, Tamil Nadu or Andhra Pradesh have taken lead in establishing storage facilities. Gujarat and Uttarakhand have taken immediate efforts for soil conservation and watershed development.

Ancillary activities

With the spread of education, availability of educational institutions, and concentration of education towards agriculture and more importantly agriculture ancillary industries like tractors, thrashers, or combines, financing needs for these types of activities popularly known as ancillary activities have gone up. Do the present directions touch financing in this area?

Let me draw your attention to annexure 2 and page 33 for reference.

Loans for setting up of Agri-clinics and Agri-business centers.

(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 a 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 the agriculture sector as per the conditions specified in paragraph 21 of these Master Directions.

Also, Loans sanctioned by banks to registered NBFCs (other than MFIs) as per conditions specified in paragraph 22 of these Master Directions.

When the norms under priority sector lending were evolved in 1975 and thereafter, agriculture has grown out of the original concept of agricultural landowners or traditional industries associated with agriculture like sugar, cotton, etc. Its requirements have grown multifold.

As often explained in this article, agriculture has blossomed into a giant industry and has increased its tentacles around the globe and with uncertain weather conditions which have exacerbated its income, the following types of industries akin to agriculture with an industrial bent of business culture have come to play a major role.

Commercial banks have also financed the following types of units to increase their profits.

What are these units?

An indicative list of Permissible Activities under the Food Processing Sector as shared by the Ministry of Food Processing Industries (MOFPI):

A list of 29 activities has been given but I may give some of them. These appear on the page on page 34/35. Anyone can refer and know more information.

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, Lyophilization (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.

8. Milk and Milk products processing, including transportation, packaging, and storage.

9. Canning of Fruit, Vegetables including Mushrooms, Meat, Fish, crustaceans, molluscs, other Sea Foods, etc.

10. Milling Grains, Legumes & Pulses, Preparation of their by-products such as Bran Oil, Cattle Feed/Poultry feed, etc.

11. Processing of F&V into different products such as juices, concentrates, sauces, jam, jellies, marmalades, Chips, Flakes, Powders, etc.

12. Processing of Grains & Pulses, Fish, Meat, Poultry, Sea Foods, Egg, etc. into their different products including extruded, popped, puffed, and flaked products and their packaging and storage including fumigation, Smoking, etc.

Conclusion

The nationalization of all leading commercial banks in India in 1975 invited heated exchanges and its legality was finally settled in the Supreme court. This heralded conversion of Indian banks as the future employer of millions of young Indians from all walks of life and enshrined small units as eligible for financing without any land or other properties as collateral. Millions of small units with adequate manpower came into existence and many of them have converted themselves into giant industrial units. The current economic upheavals in agriculture need massive manpower, good infrastructure right from the sowing of seeds up to hand over of finished products at importer or consumer of products in India at nook and corner of the country. Fruits produced in Rajasthan get acceptance around the country and even transport is covered under priority sector lending.

India’s ambition to become USD 5 trillion will be achieved with proper availability of credit for all types of borrowers which is easily facilitated by priority sector lending. One has to appreciate RBI for consolidating 49 circulars from 2007 onwards. A massive and excellent work.

Disclaimer: The article contains my views on various directions issued by RBI on priority sector lending based on my 28 years of working in a leading nationalized bank and 48 years as a humble observer of banking. Neither taxguru.in nor RBI/various departments of the central government are responsible for my views. Please consult various RBI circulars for guidance or relevant professionals duly certified.