PRIORITY SECTOR LENDING S THOMAS PUNNOOSE MEMBER OF FACULTY RBI, CAB, PUNE ACA-TM-37 (v2.2-20-Nov-10) Lending to the Priority Sector BANK Financial Intermediation Operational Efficiency Allocational Efficiency ACA-TM-37 (v2.2-20-Nov-10) Sectoral composition of GDP percent Year Agriculture Industries Services Total 1950-51 51.88 11.10 34.63 100.00 1960-61 47.65 13.68 36.60 100.00 1970-71 41.66 15.98 40.91 100.00 1980-81 35.69 18.05 45.26 100.00 1990-91 29.53 20.56 49.61 100.00 2000-01 22.31 20.69 57.00 100.00 2010-11 14.51 19.95 65.54 100.00 2011-12 14.01 19.22 66.77 100.00 ACA-TM-37 (v2.2-20-Nov-10) Outstanding Credit of Scheduled Commercial Banks (according to occupation) percent At end Agriculture Industries Services Total December 1972 9.0 61.2 29.8 100.00 June 1981 16.7 49.1 34.1 100.00 March 1991 15.0 47.6 37.5 100.00 March 2001 9.6 43.9 46.5 100.00 March 2011 11.3 39.6 49.1 100.00 ACA-TM-37 (v2.2-20-Nov-10) New Priority Sector Guidelines – Basic Philosophy • Viable and creditworthy sectors that may not get timely and adequate credit • Not a Corporate Social Responsibility but a normal business operation for banks • Lending directly through beneficiaries instead of routing them through intermediaries • Create innovative processes ACA-TM-37 (v2.2-20-Nov-10) structures, products and Priority Sector Classification - Wrong notions • Priority Sector guidelines are aimed at helping banks attain the targets • If a sector is not classified as priority sector, it will not get bank credit ACA-TM-37 (v2.2-20-Nov-10) Categories under Priority Sector 1. Agriculture 2. Micro & Small enterprises 3. Education 4. Housing 5. Export Credit 6. Others ACA-TM-37 (v2.2-20-Nov-10) 7 ACA-TM-37 (v2.2-20-Nov-10) 8 Categories Domestic Commercial Banks / Foreign Banks with 20 and above branches Foreign banks with less than 20 branches Total Priority Sector 40% of ANBC or credit equivalent amount 32% of ANBC or credit of Off-Balance Sheet exposure, whichever equivalent amount of Offis higher Balance Sheet Exposures whichever is higher Total Agriculture • 18% but Indirect lending > 4.5% will not No specific target. Forms part be reckoned for computing achievement of total priority sector under 18% target Micro and Small Enterprises • 40% of total advances to MSE to : No specific target. Forms part -Micro (Mfg) with P/M upto Rs.5 lakh of total priority sector - Micro (Ser) with equip upto Rs.2 lakh • 20% of total advances to MSE to: -Micro (Mfg) with P/M > Rs.5 lakh and upto Rs.25 lakh - Micro (Ser) with equip > Rs.2 lakh and upto Rs.10lakh Export Credit Not a separate category. Export credit to No specific target. Forms part eligible activities under agriculture and of total priority sector MSE will be reckoned for Priority Sector Advances to Weaker Sections 10% of ANBC or credit equivalent amount No specific target in the total 9 of Off-Balance Sheet Exposure whichever priority sector ACA-TM-37 (v2.2-20-Nov-10 ) Targets/Sub-Targets under Priority Sector – For foreign banks with 20 and above branches, priority sector targets and sub-targets to be achieved within a maximum period of five years starting from April 1, 2013 and ending on March 31, 2018 – They are to submit an action plan latest by December 31, 2012 for achieving the targets, to be approved by RBI ACA-TM-37 (v2.2-20-Nov-10) 10 Computation of ANBC Bank Credit in India (as prescribed in item No. VI of Form ‘A’ [Special Return as on March 31st] under Sec 42 (2) of RBI Act, 1934 I Bills rediscounted with RBI and other approved Financial Institutions II Net Bank Credit III (I – II) Investments in Non-SLR categories under HTM Category + other investments eligible to be treated as priority sector Adjusted Net Bank Credit (ANBC) IV III + IV Banks should not deduct / net any amount like provisions, accrued interest etc from NBC ACA-TM-37 (v2.2-20-Nov-10) 11 Agricultural Credit Target fixed by the Government of India for 2012-13 is Rs.5,75,000 crore ACA-TM-37 (v2.2-20-Nov-10) 12 Direct Agriculture • Loans to individual farmers (including groups of individual farmers) engaged in Agriculture and Allied Activities (dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture) • Short-term loans for raising crops (will include traditional / non-traditional plantations, horticulture and allied activities) • Medium & Long-term loans to farmers for agriculture & allied activities (purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm and development loans for allied activities) ACA-TM-37 (v2.2-20-Nov-10) 13 Direct Agriculture: Loans to • Farmers for pre-harvest and post-harvest activities viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. • Farmers upto Rs.25 lakh against pledge / hypothecation of agricultural produce, for a period not exceeding 12 months • Small & Marginal Farmers for purchase of land for agricultural purposes ACA-TM-37 (v2.2-20-Nov-10) 14 Direct Agriculture: Loans to • Distressed farmers indebted to non-institutional lenders • Bank loans to PACS, Farmers’ Service Societies and Large-sized Adivasi Multi Purpose Societies ceded to or managed / controlled by such banks for on-lending to farmers for agriculture/allied activities • Loans to farmers under KCC Scheme • Export credit to farmers ACA-TM-37 (v2.2-20-Nov-10) 15 Direct Agriculture • Loans to corporates, including farmers’ producer companies of individual farmers partnership firms and cooperatives of farmers directly engaged in Agriculture and Allied Activities (dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture) upto an aggregate limit of Rs.2 crore • Short-term loans for raising crops (will include traditional / non-traditional plantations, horticulture and allied activities) • Medium & Long-term loans for agriculture & allied activities (purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm and ACA-TM-37 (v2.2-20-Nov-10 ) 16 Indirect Agriculture: Loans for • Pre-harvest and post-harvest activities viz., spraying, weeding, harvesting, sorting and grading • Upto Rs.25 lakh against pledge / hypothecation of agricultural produce, for a period not exceeding 12 months • Export credit to corporates, partnership firms and institutions for exporting their own farm produce ACA-TM-37 (v2.2-20-Nov-10) 17 Indirect Agriculture: Loans to • Loans upto Rs5 crore to Producer Companies set up exclusively by only small and marginal farmers, for agricultural and allied activities • Bank loans to PACS, Farmers’ Service Societies and Large-sized Adivasi Multi Purpose Societies other than those covered under direct agriculture ACA-TM-37 (v2.2-20-Nov-10) 18 Other Indirect Agriculture Loans • Loans upto Rs.1 crore per borrower to dealers / sellers of fertilizers, pesticides, seeds, cattle feed poultry feed, agricultural implements & other inputs • Loans for setting up of Agriclinics and Agribusiness Centres • Loans upto Rs.5 crore to cooperative societies of farmers for disposing of the produce of members ACA-TM-37 (v2.2-20-Nov-10) 19 Other Indirect Agriculture: Loans to • Custom Service units managed by individuals / institutions / organizations who maintain a fleet of tractors/bulldozer/well-boring equipment/threshers etc and undertake farm work for farmers on contract basis • Loans for construction & running of storage facilities (warehouse, market yards, godowns & silos) including cold storage units designed to store agriculture produce/products irrespective of their location ACA-TM-37 (v2.2-20-Nov-10) 20 Other Indirect Agriculture: Loans to • MFIs for on-lending to farmers for agriculture and allied activities as per the following conditions: - Not less than 85% of total assets of the MFI (other than cash, balances with banks and FI, government securities and money market instruments) are in the nature of qualifying assets. - In addition, aggregate amount of loan, extended for income generating activity is not less than 75% of the total loans given by MFIs ACA-TM-37 (v2.2-20-Nov-10) 21 Other Indirect Agriculture: Loans to • MFIs for on-lending to farmers for agriculture and allied activities as per the following conditions (contd…..): - Further, banks have to ensure that MFIs comply with caps on margin and interest rates as also other pricing guidelines to be eligible to classify these loans as priority sector - Banks should obtain from MFI at the end of each quarter a CA’s certificate ACA-TM-37 (v2.2-20-Nov-10) 22 Qualifying Assets – means a loan disbursed by MFI satisfying the following conditions: • Loan is to be extended to a borrower whose household annual income is not > Rs.60,000 (rural) and Rs.1,20,000 (non-rural areas) • Loan does not exceed Rs.35,000 in the 1st cycle and Rs.50,000 in subsequent cycles • Total indebtedness of the borrower does not exceed Rs.50,000 • Tenure of the loan is not less than 24 months when loan exceeds Rs.15,000 with right to borrower of prepayment without penalty\ • The loan is without collateral • Loan is repayable by weekly, fortnightly or monthly installments at the choice of the borrower ACA-TM-37 (v2.2-20-Nov-10) 23 Caps on Margin / Interest rates / pricing • Margin cap at 12% for all MFIs. The interest cost is to be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets • Interest cap on individual loans at 26% per annum for all MFIs to be calculated on a reducing balance basis • Only 3 components to be included in pricing of loans viz., processing fee not > 1% of gross loan amount, interest charge & insurance premium • Processing fee not to be included in margin cap or interest cap of 26% • There should be no penalty for delayed payment • No Security Deposit / Margin are to be taken ACA-TM-37 (v2.2-20-Nov-10) 24 CA’s Certificate should state that: • 85% of the total assets of the MFI are in the nature of “qualifying assets” • The aggregate amount of loan, extended for income generation activity is not less than 75% of the total loans given by the MFI • Pricing guidelines are followed ACA-TM-37 (v2.2-20-Nov-10) 25 Other Indirect Agriculture: Loans to • NGOs which are SHG Promoting institutions for onlending to members of SHGs under SHG-Bank Linkage Programme for agricultural and allied activities. The all inclusive interest rate charged by the NGO / SHG promoting entity should not exceed the Base Rate of the lending bank plus 8% per annum • Loans sanctioned to RRBs for on-lending to agriculture and allied activities ACA-TM-37 (v2.2-20-Nov-10) 26 ACA-TM-37 (v2.2-20-Nov-10) 27 Micro & Small Enterprises MSEs include • Manufacturing Enterprises: – Micro enterprises – Investment in plant & machinery does not exceed Rs 25 lakh irrespective of the location – Small enterprises – Investment more than Rs.25 lakh but does not exceed Rs 5 crore • Service Enterprises: – Micro enterprises - Investment in equipment not exceeding Rs 10 lakh – Small (service) enterprises - Investment in equipment is more than Rs.10lakh but does not exceed Rs 2 crore. ACA-TM-37 (v2.2-20-Nov-10) 28 Micro & Small Enterprises • Bank loans to micro and small enterprises (both manufacturing and service) are eligible to be classified under PS. • The small and micro (service) enterprises include – small road & water transport operators – small business – professional & self-employed persons – Retail trade – Consultancy services ACA-TM-37 (v2.2-20-Nov-10) 29 MSE – Direct Finance • Manufacturing Enterprises: MSEs engaged in the manufacture/production of goods to any industry specified in the 1st Schedule to Industries (Development & Regulation) Act, 1951 - Loans for food and agro processing • Service Enterprises: - Bank loans upto Rs.2 crore per unit to MSE engaged in providing or rendering of services • Export credit to MSE units: for exporting of goods/services • Khadi and Village Industries Sectors: all loans sanctioned to units in the KVI sector irrespective of size of operations, location and amount of original investment in P&M ACA-TM-37 (v2.2-20-Nov-10) 30 MSE – Indirect Finance • Loans to persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries • Loans to cooperatives decentralized sector viz., of producers artisans, in the village and cottage industries • Loans sanctioned by banks to MFIs for on-lending to MSE sector as per conditions specified earlier ACA-TM-37 (v2.2-20-Nov-10) 31 ACA-TM-37 (v2.2-20-Nov-10) 32 Education loans • Loans granted to individuals for educational purposes including vocational courses upto Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad. ACA-TM-37 (v2.2-20-Nov-10) 33 ACA-TM-37 (v2.2-20-Nov-10) 34 Housing loans • Loans to individuals upto Rs.25 lakh in metropolitan centres with population > ten lakh & Rs.15 lakh in other centres for purchase/construction of a dwelling unit per family (excluding loans granted by banks to their own employees). • Loans given for repairs to the damaged dwelling units of families up to Rs. 2 lakh in rural and semiurban areas and up to Rs. 5 lakh in urban and metropolitan areas ACA-TM-37 (v2.2-20-Nov-10) 35 Housing loans • Bank loans to any governmental agency for construction of dwelling units / slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs.10 lakh per dwelling unit. • Loans sanctioned by banks for housing projects exclusively for the purpose of construction of houses only to economically weaker sections and LIGs the total cost of which is not > Rs. 10 lakh per dwelling unit. (family income limit Rs.1.20 lakh per annum irrespective of location) ACA-TM-37 (v2.2-20-Nov-10) 36 Housing loans • Bank loans to HFCs, approved by NHB for their refinance, for onlending for the purchase/construction/reconstruction dwelling units or for slum purpose of of individual clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs.10 lakh per dwelling unit. The all inclusive interest rate charged to the ultimate borrower should not exceed the lowest lending rate of the lending bank for HLs + 2% per annum ACA-TM-37 (v2.2-20-Nov-10) 37 Housing loans • Eligibility under priority sector loans to HFCs is restricted to 5% of the bank’s total PS lending, on an ongoing basis. The maturity of bank loans should be co-terminus with average maturity of loans extended by HFCs. Banks should maintain necessary borrowerwise details of the underlying portfolio. ACA-TM-37 (v2.2-20-Nov-10) 38 ACA-TM-37 (v2.2-20-Nov-10) 39 Export Credit • Extended by foreign banks with less than 20 branches will be reckoned for priority sector target achievement • As regards domestic banks and foreign banks (with 20 and above branches), export credit is not a separate category under priority sector • Export credit towards categories of priority sector i.e. agriculture and MSE sector will however be accounted ACA-TM-37 (v2.2-20-Nov-10) 40 ACA-TM-37 (v2.2-20-Nov-10) 41 Others: • Loans not exceeding Rs.50,000/- per borrower provided directly by banks to individuals and their SHG / JLG (provided borrower’s household annual income does not exceed Rs.60,000/- in rural areas and Rs.1,20,000/- in non-rural areas) • Loans to distressed persons (other than farmersalready included) not > Rs.50,000/- per borrower to prepay their debt to non-institutional lenders • Loans outstanding under loans for general purposes under GCC ACA-TM-37 (v2.2-20-Nov-10) 42 Others: • Overdrafts upto Rs.50,000 (per account) granted against ‘no-frills’ accounts (provided borrower’s household annual income is not > Rs.60,000/- in rural areas & Rs.1,20,000/- in non-rural areas) • Loans sanctioned to State Sponsored Organizations for SCs / STs for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organizations • Loans sanctioned by banks directly to individuals for setting up of off-grid solar and other off-grid renewable energy solutions for households ACA-TM-37 (v2.2-20-Nov-10) 43 ACA-TM-37 (v2.2-20-Nov-10) 44 Weaker Sections Category • Small (landholding more than 1 hectare but less than 2 hectares) Marginal farmers and (landholding upto 1 hectare) • Artisans, village and cottage industries where credit limits do not exceed Rs.50,000. • Beneficiaries of SGSY • Scheduled Castes and Scheduled Tribes • Beneficiaries of DRI Scheme • Beneficiaries of SJSRY • Beneficiaries under the SRMS ACA-TM-37 (v2.2-20-Nov-10) 45 Weaker Sections Category • Loans to SHGs • Loans to distressed farmers indebted to non-institutional lenders • Loans to distressed persons (other than farmers) not exceeding Rs.50,000 per borrower to prepay their debt to non-institutional lenders • Loans to individual women beneficiaries upto Rs.50,000 per borrower • Loans sanctioned to persons from minority community ACA-TM-37 (v2.2-20-Nov-10) 46 ACA-TM-37 (v2.2-20-Nov-10) 47 Significance of MIS • A robust MIS is a prerequisite for - effective monitoring of performance - understanding the gaps - formulating the right policy responses • Processing of data into useful information for MIS and decision support systems in individual banks as well as at the aggregate level is important ACA-TM-37 (v2.2-20-Nov-10) 48 Branches Existing Framework of MIS Block Coordinator District Coordinator State Controlling Offices LDMs HO IBA RPCD-CO ACA-TM-37 (v2.2-20-Nov-10) SLBC RPCD-RO RPCD-RO SLBC NABARD 49 Returns presently furnished by banks No Returns submitted to Submitted by No. of returns 1. RBI- RPCD SCB RRBs Cooperative Banks 42 9 15 2. RBI-DSIM SCB 7 Basic Statistical Returns 3. NABARD RBI IBA SLBC LDM RRB Cooperative Banks Multiple Returns to monitor the performance of SCBs and supervisory returns for RRBs and Cooperative Banks 4. IBA SCB 4 5. SLBC LDM SCB – Controlling Offices Differs from State to State 6. Government Departments RBI SLBC NABARD Varies from time to time ACA-TM-37 (v2.2-20-Nov-10) 50 Efforts made so far • NABARD WG constituted to review SAMIS - development of standardized information system - BSR coding system as the base for fixing codes • Ray WG constituted by RBI – 2007 – data-based reporting in place of return-based reporting system – formulated an extended coding system ACA-TM-37 (v2.2-20-Nov-10) 51 Priority Sector Monitoring Information System • Data to be captured at the base level entity • Transmitted to a National Level Central Database common across banks • The Central Data Repository System will process the data centrally and make it available across all the stakeholders • Once functional PSMIS would make available detailed bank-wise, sub-sector wise, state-wise, district-wise, block-wise and branch-wise information ACA-TM-37 (v2.2-20-Nov-10) 52 Proposed Final Framework under CDRS Transactional Data Validation HO Processing and Generation of Reports RBI-DSIM Branches RBI-RPCD ACA-TM-37 (v2.2-20-Nov-10) CDRS NABARD SLBC LDM 53 Timeframe to implement the new approach • 1st Phase: creation of CDRA and preparing the banking system for moving towards PSMIS • 2nd Phase: setting up of CDRS, release of PSMIS codes, issue of revised guidelines • 3rd Phase: to put in place a secured way of capturing the data from the base system of banks • 4th Phase: CDRA to complete implementation of CDRS ACA-TM-37 (v2.2-20-Nov-10) 54 An interim solution Transactional Data Branches Processing and report based submission Processing and Compilation HO RPCD-CO SLBC NABARD LDM ACA-TM-37 (v2.2-20-Nov-10) 55 Priority-Sector Data Reporting System • A robust reporting system with granularity and system generation of priority sector data is of utmost importance for proper monitoring and appropriate policy making. • Guidelines will be issued in due course ACA-TM-37 (v2.2-20-Nov-10) 56 ACA-TM-37 (v2.2-20-Nov-10) 57 Non-achievement of priority sector targets • Domestic scheduled commercial banks & foreign banks with branches 20 and above having shortfall in lending to priority sector / agriculture / weaker sections shall be allocated amounts for contribution to the RIDF (NABARD) or funds with NHB / SIDBI etc • Foreign banks with less than 20 branches which fail to achieve the priority sector targets are required to contribute funds with SIDBI or with FI as may be stipulated by RBI ACA-TM-37 (v2.2-20-Nov-10) 58 Common guidelines for priority sector loans • Service Charges: No loan related and adhoc service charges / inspection charges to be levied on PS loans upto Rs.25,000 • Receipt, Sanction / Rejection / Disbursement Register: a register / electronic record to be maintained and made available to all inspecting agencies • Issue of acknowledgement of Loan Applications ACA-TM-37 (v2.2-20-Nov-10) 59 Investment by banks in securitized assets • representing loans to PS (except ‘others’ category) are eligible for classification under respective categories of PS depending on the underlying assets provided: – the securitized assets are originated by banks / Fis and are eligible to be classified as PS advances prior to securitization – the all inclusive interest charged to the ultimate borrower by the originating entity should not exceed Base Rate + 8% • originated by NBFCs where underlying assets are loans against gold jewellery are not eligible for PS status ACA-TM-37 (v2.2-20-Nov-10) 60 Transfer of assets through direct assignment / outright purchases • of pool of assets by banks representing loans under various categories of PS (except ‘others’ category) are eligible for classification under respective categories of PS provided: – the securitized assets are originated by banks / Fis and are eligible to be classified as PS advances prior to purchase – the eligible loan assets so purchased should not be disposed of other than by way of repayment – the all inclusive interest charged to the ultimate borrower by the originating entity should not exceed Base Rate + 8% ACA-TM-37 (v2.2-20-Nov-10) 61 Inter Bank Participation Certificates • IBPCs bought by banks on a risk sharing basis shall be eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorized under the respective categories of PS and the banks fulfill the RBIs guidelines on IBPCs ACA-TM-37 (v2.2-20-Nov-10) 62 THANK YOU Email: stpunnoose@rbi.org.in ACA-TM-37 (v2.2-20-Nov-10)