By Prabal Goel and Nandita Prabhu, IFMR Capital
On 2nd July, 2012, Reserve Bank of India (RBI) came out with Master Circulars on various topics containing directions to the banks. Among these was also the Master Circular on Priority Sector Lending, containing directions to banks, including Scheduled Commercial Banks and Regional Rural Banks. This post discusses the key features of the Master Circular on Priority Sector Lending as addressed to Scheduled Commercial Banks (excluding Regional Rural Banks). Notably, the recommendations of Report of the Nair Committee on Priority Sector Lending which were released in February 2012 have not been implemented by the RBI yet.
Some of the key highlights are:
1. The broad categories of priority sectors remain unchanged from the Master Circular of 2011. These broad categories are- Agriculture, Micro and Small Enterprises, Micro Credit, Educational Loans and Housing Loans.
2. The targets to be achieved by Scheduled Commercial Banks remain same as before. Domestic banks have to advance 40% of Adjusted Net Bank Credit or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. The corresponding target for Foreign Banks is 32%.
3. 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 continue to be eligible for categorisation as priority sector advance under respective categories viz., agriculture, micro and small enterprise, and micro credit (for other purposes), as indirect finance, subject to them meeting the guidelines issued by RBI on the subject.
4. As before, the investment made by the banks in the securitised loans shall be classified as advances to Priority Sector, if the securitised loans themselves could be classified prior to securitisation. The investments made by the banks shall be classified as advances to Priority Sector in the same category in which the loans themselves prior to securitisation would have been classified.
5. Following changes have been noticed in the Master Circular released this year:
i. It has been clarified by RBI that credit to farmers under the Kisan Credit Card, being primarily for credit purposes, would be treated as direct finance for agriculture under priority sector lending.1
ii. To clear doubts on whether financial activities which promote dairy development in districts would enjoy PSL status, it has been clarified that as credit under the dairy segment (including procurement, storage, processing, collection, transportation, etc.) primarily benefits small/marginal farmers and tiny units, bank credit to all activities which contribute to the development of dairy business would be treated as indirect finance to agriculture under priority sector. Banks have been advised to ensure that such investment benefit farmers engaged in dairy farming.2
iii. The words “SSI unit” have been excluded from paragraph 1.3.9 from Master Circular. However, this change is only of academic interest. Finance to storage units which are not registered as micro and small enterprise would still be deemed to be “priority sector advance.” This is because paragraph 2.1.1 deems finance to micro and small manufacturing enterprises, including inter alia, enterprises engaged in preservation of goods (which must include within its ambit, agricultural produce), as “priority sector advance”. Registration of micro and small enterprises is not compulsory under MSMED Act, 2006 and vide para 2.1.2(d), it is this Act which is the reference point for fixing eligibility for classification under priority sector.
iv. Earlier, assistance given by Scheduled Commercial Banks to a non-governmental agency approved by NHB for their refinance for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers would be treated as Priority Sector advances, subject to a ceiling of loan component of Rs. 5 lacs per dwelling unit. This limit has been enhanced to Rs. 10 lacs, for loans sanctioned after April 24, 20123. For the loans sanctioned before April 24, 2012, the ceiling continues to be Rs. 5 lacs. Thus, RBI has incorporated the proposal by Mr. Pranab Mukherjee, (ex) Hon’ble Minister of Finance made in his Union Budget speech (for the year 2012-13).4
v. Now onwards, only the loans granted by Scheduled Commercial Banks to HFCs for refinance and for on lending to the extent of 5% of bank’s total priority sector lending shall be classified as Priority Sector advances. To discourage the practice of banks granting short term loans to HFCs (while the loans granted by HFCs to the individuals are generally repayable over long and medium term), the banks must link the tenor of loans granted by them to HFCs in line with the average portfolio maturity of housing loans granted by HFCs or such loans shall not be treated as Priority Sector advances. The circular containing this prescription had been in force since 18 December, 20095. However, this direction was missing from the Master Circular on Priority Sector Lending released July last year (2011).
The Master Circular released this year is substantially similar to the one released in 2011. Some clarifications have been issued by RBI in this master circular which will bring about end to some confusing issues. In addition, affordable housing finance is likely to get a modicum of boost owing to its incorporation in the Master Circular.
1- Paragraph 1.1.3(Section I), Master Circular on Priority Sector Lending released on July 2, 2012.
2- ibid., paragraph 1.3.2.
3- Ibid., paragraph 6.4
4- Paragraph 65 of The Union Budget Speech for the year 2012-13 delivered by Mr.Pranab Mukherjee.
5- See RPCD.CO.Plan.BC.46/04.09.01/2009-10