Mumbai: The Reserve Bank Thursday revised priority sector lending norms to ensure a phased increase in loans to small farmers, and also made it clear that smaller foreign banks will have to meet the 40 percent target over the next five years.
The RBI also said overdrafts of up to Rs 5,000 being extended by banks under the PM's new financial inclusion drive will also be treated as priority sector lending (PSL), subject a cap on annual household income--which is Rs 1 lakh for rural and Rs 1.60 lakh for non-rural households.
Under the new guidelines, issued a day after the suicide of a farmer at a rally in Delhi, credit to small and marginal farmers will should be 8 percent of a bank's total credit by by March 2017.
Medium enterprises, social infrastructure and renewable energy are new sectors which will qualify under the mandatory priority sector norms which aim at uplifting the weaker sections of the economy by increasing formal credit to them, the RBI said in a circular this evening.
Banks are asked to lend 40 percent of their credit to such sections, failing which money gets deposited into a low-yielding fund for rural development.
Free market advocates complain against the necessity of having such a requirement, saying it stifles banks' growth.
For foreign banks, where the mandatory PSL has been a contentious issue, RBI today said banks with less than 20 branches will have to gradually achieve the 40 percent target by March 2020.
Given the limitations of their networks, smaller foreign banks can book up to 32 percent of their annual loans to the export sector, it added.
Those with over 20 branches, which already have PSL targets and sub-targets for agriculture and weaker sections to be achieved by March 2018 under a previously announced plan, adding sub-targets for small and marginal farmers and micro-enterprises will be made applicable post-2018, after a review in 2017.
Dispensing away with the distinction between direct and indirect agriculture lending, the new guidelines set a target of 8 percent for small and marginal farmers to be achieved by March 2017.
The regulator has also set a target of 7.5 percent for lending to micro-enterprises, while retaining the 10 percent target for the weaker sections.
The RBI also said bank loans to food and agro processing units will form part of agriculture. To all other banks, the mandated credit requirement for the export sector stands at 2 percent.
"The new additions are good and better aligned to the way the economy is expected to grow. The only concern I have is around the ability of these small and marginal farmers to absorb that level of credit," leader for banking and capital markets at PwC India Shinjini Kumar told PTI.
She further said, "I think it will require other social and physical infrastructure that empowers them to crate sustainable income from their farms, that may be beyond the capacity of commercial banks."
In another significant move, the RBI has said the non-achievement will be assessed on quarterly average basis from 2016-17 onwards, instead of the present calculation on an annual basis, which leads to bunching up of PSL in the last quarter.
The definition of housing loans and microfinance loans qualifying under the PSL has also been revised, the RBI said, adding loans of up to Rs 28 lakh in the metros and Rs 20 lakh in non-metros will constitute PSL lending, it said.
Credit to MFIs extended for on-lending to individuals and groups can be classified as PSL under categories like agriculture, micro, small and medium enterprises, and others, as indirect finance, "provided not less than 85 percent of total assets of MFI are in nature of qualifying assets", it said.
For the newly introduced sectors, a medium enterprise loan will earn the PSL tag if the total investment in plant and machinery is between Rs 5 and 10 crore, while loans of up to Rs 5 crore to build schools, health care facilities, drinking water facilities and sanitation facilities in tier II to tier VI centres will qualify for PSL tag under social infrastructure, it said.
In case of renewable energy, a loan of up to Rs 15 crore for power generators from solar, biomass, wind, micro-hydel and non-conventional energy-based public utilities like street lighting systems, and remote village electrification will qualify for PSL.
Additionally, a special dispensation has been given for households wherein loans of up to Rs 10 lakh will qualify for PSL, it said.
Apart from this, buying inter-bank participation certificates and PSL certificates will also qualify for PSL.
