Banking News

Concept of Priority Sector Lending & revised guidelines


Traditionally, banking was unknown to present day concept of priority sector lending. The commercial banks in India used to provide security oriented finance to trade and industry. Big industrial houses and traders were beneficiaries of security oriented lending concept and a large chunk of bank finance was enjoyed by them. The National Credit Council in its meeting held in July 1968 highlighted that commercial banks ought to increase their participation in the financing of priority sectors, viz., agriculture and small scale industries for all round development of the country. The sketch of the priority sectors was later formalized in 1972 on the basis of the ‘Informal Study Group’ on Statistics report, linking to advances to the Priority Sectors. Initially there was no exact target fixed in respect of priority sector lending, however, on the basis of the recommendations of the ‘Working Group on the Modalities of Implementation of Priority Sector Lending’, all commercial banks were subsequently advised to achieve the target of priority sector lending. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. With the implementation of priority sector lending the sizeable portion of bank finance flown out of so called security oriented bank finance and same has been diverted to social banking. By the year 1985, the target for priority sector lending fixed by RBI raised to 40 per cent of aggregate bank advances. Hence the sector which was the least priority of commercial banks becomes the priority sector for the purpose of lending.
The advances extended to Agriculture sector, Micro and Small enterprises have been the major beneficiaries under concept of priority sector lending. Housing loan, education loan, advances to weaker sections, Differential Rate of Interest Scheme (DIR scheme) etc. are the other priority sector advances benefitted by the concept of priority sector lending. At present the targets and sub-targets under priority sector lending fixed by RBI remains at 40% of Adjusted Net Bank Credit (ANBC) of commercial banks or credit equivalent amount of their Off-Balance Sheet Exposure, whichever is higher.
Taking note of M.V.Nair committee, RBI revised its guidelines on priority sector lending with effect from 17.10.2012. Under the revised guidelines of priority sector advances, currently 18 per cent of ANBC is reserved for agriculture advance which includes 13.5% for direct and 4.5% to indirect finances. The loans made to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers are the examples of direct finance. Direct finance includes allied activities such as dairy, fishery, piggery, poultry, bee-keeping, etc. Indirect finances for agriculture are solely linked to agricultural activities or those who extend credits to farmers. The finance made to commission agents, Self Help Groups(SHG), co-operative societies, Food and agro based processing units, dealers of fertilizers, pesticide seeds, cattle feed, poultry feed etc. are examples of indirect finance to agriculture. The two-third of loans to corporate, partnership firms and institutions in excess of Rupees one crore for Agriculture and Allied Activities are also treated as indirect finance to agriculture.
Under the revised guidelines loans granted for Micro and Small Services Enterprises up to Rs.2 Crores is classified as priority sector advance. All loans to manufacturing units of Micro and small enterprises are classified as priority sector advance.
Other Priority Sector Advances:
Education Loans: Education Loans granted to individuals for pursuing vocational courses, up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad is classified as priority sector advance.
Housing Loans: Housing Loans up to Rs. 25 lakh, irrespective of location, to individuals for purchase/construction of a dwelling unit per family, excluding loans granted by banks to their own employees, w.e.f. April 1, 2011. The housing loans which were sanctioned up to March 31, 2011, the limit would be Rs. 20 lakh to classify as priority sector lending.
Credits to Weaker Sections: Bank credits to weaker sections are categorized as priority sector which now includes housing loan exclusively for weaker section where cost of construction does not exceed Rs.10 lakh per unit and loans to distressed poor to prepay their debt to institutional lenders
Setting up off-grid solar and renewable energy solutions: Bank credit to setting up off-grid solar and renewable energy solutions for house hold is classified as priority sector advance under revised guidelines.

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