NotesfromDr.

ChandanDasguptaforthesubjectCommercialBankManagement
PRIORITY SECTOR Initially, in July 1968, at a meeting of National Credit Council, it was emphasized that commercial banks should increase their involvement in the financing of priority sectors. The description of the priority sectors was later formalized in 1972. In Nov 1974, banks were advised to raise the share of these sectors to the level of 33 1/3 % by March 1979. Subsequently, on the basis of the recommendations of the Working Group (Chairman: Dr. K.S. Krishnaswamy), all commercial banks were advised to achieve the target of priority sector lending at 40% of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections. On the recommendations of an Internal Working Group was set up in RBI (Chairman: Shri C. S. Murthy), RBI revised the guidelines (RBI Cir April 30, 2007) that became effective with immediate effect. Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/ approvals for various purposes. CATEGORIES OF PRIORITY SECTOR Priority sector includes i. ii. iii. iv. v. vi. Agriculture (Direct and Indirect finance). Small Enterprises (Direct and Indirect Finance), Retail Trade Micro Credit Education loans and Housing loans

WEAKER SECTION IN PRIORITY SECTOR The concept of weaker sections under priority sector was introduced as per recommendations of Krishnaswami Committee (1980). It comprises: 1. Small and marginal farmers with land holding of 5 acres and less and landless labourers, tenant farmers and share croppers. 2. Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,000/3. Beneficiaries of Swarnajayanti Gram Swarojgar Yojana (SGSY)

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NotesfromDr.ChandanDasguptaforthesubjectCommercialBankManagement
4. Scheduled Castes and Scheduled Tribes 5. Beneficiaries of Differential Rate of Interest (DRI) scheme 6. Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY) 7. Beneficiaries under the scheme for Liberation and Rehabilitation of Scavengers (SLRS). 8. Advances to Self Help Groups including NGOs for on-lending purposes 9. Loans to distressed poor to prepay their debt to non-institutional lenders. Loans to Minority community to be included within the respective sub-category, above. PRIORITY SECTOR GOALS FOR SCHEDULED COMMERCIAL BANKS (EXCLUDING RRBS) Overall credit to priority sector (% of adjusted net bank credit OR credit equivalent of Off-balance sheet exposure, whichever higher). Agriculture (% to ANBC or CEOBE) (or 45% of priority sector loans) Within agriculture Maximum for indirect as % of agriculture advances (4.5% of ANBC) Weaker section (% of ANBC or CEOBE) Differential Rates of Interest (of total advances of previous year) Within DRI to SC/ ST beneficiaries Within DRI through rural/ semi urban branches of banks Small enterprise sector Overall target for domestic Banks Of o/s credit to M&SE to micro enterprises with investment in plant & machinery up to Rs. 5 lac and investment in equipment up to Rs. 2 lac in service providing units Micro enterprises with investment in plant & machinery above 5 lac but up to Rs. 25 lac and investment in equipment up to Rs. 10 lac in service providing units Small enterprises having investment in plant and machinery above Rs. 25 lac and investment in equipment above Rs. 10 lac in service providing units (maximum) Export Credit- not a priority sector credit for Indian banks (% of ANBC or CEOBE) Credit to women beneficiaries (% of ANBC or CEOBE) outside priority sector Housing finance (% of incremental deposit for last reporting Friday of previous year) Foreign banks: Priority Sector overall (% of ANBC or CEOBE) M&SE Credit (% of ANBC or CEOBE) Export credit (% of ANBC or CEOBE) 40% 18% 25% 10% 1% 40% 2/3rd Nil 40%

20%

40%

12% 5% 3% 32% 10% 12% Page|2

NotesfromDr.ChandanDasguptaforthesubjectCommercialBankManagement
Priority Sector-Loans: RRBs (or total advances) Within this, for Weaker Section (of total advances) Priority Sector overall for Urban Coop Banks (of Adjusted bank credit) MSE advances target for all banks20% annual Increase. No. of accounts increase 10% Agriculture loans disbursement 2011-12 60% 15% 40%

475000 cr

LINKAGE OF PRIORITY SECTOR ADVANCES Priority Sector targets are linked to Adjusted Net Bank Credit (ANBC) or Credit Equivalent amount of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the previous year. 1. ANBC means Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM category. 2. Investments in the Recapitalization Bonds of Govt. of India will not be taken into account for the purpose of calculation of ANBC. Existing investments and fresh investment, made by banks in non-SLR bonds held in HTM category will be taken into account for calculation of ANBC. 3. Deposits placed by banks with NABARD/ SIDBI, as the case may be, in lieu of non-achievement of priority sector lending targets/ sub-targets, through shown under Schedule 8Investments in the Balance Sheet at item I (vi) Others, will not be treated as investment in non-SLR bonds held under HTM category. 4. For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks may use current exposure method. 5. ANBC or credit equivalent of Off-Balance Sheet Exposures will be computed with reference to the outstanding as on March 31 of the previous year. 6. Outstanding FCNR (B) and NRNR deposits balances will not be deducted for computation of ANBC. Net Bank Credit for priority sector purpose: It includes inter-bank participations but excludes bills rediscounted with the RBI, IDBI, EXIM Bank and other approved financial institutions.

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NotesfromDr.ChandanDasguptaforthesubjectCommercialBankManagement
Reporting Data on Priority Sector Advances Banks are to furnish data on priority sector advances on a quarterly basis as on last reporting Fridays of March June, September and December of a particular year, within 15 days from the reference date. SHORTFALL IN TARGETS: FOREIGN BANKS Amount of shortfall (with reference to the overall target (32%) or aggregate shortfall in sub-targets small enterprise sector (10%) and export credit (12%), whichever is higher, computed as on last reporting Friday of March every year, will be placed with SIDBI (in Small Enterprises Development Fund) or any other fund notified by RBI. SHORTFALL IN TARGETS: DOMESTIC BANKS 1. Banks with shortfall in lending to (a) priority sector target (40%) (b) agriculture target (18%) (c) weaker section (10%) shall be deposited in RIDF established with NABARD or any other fund, announced by RBI. RIDF was established for 1995-96. RIDF corpus is announced by Ministry of Finance every year. For allocation of RIDF tranche, the achievement level of PS lending as on the last reporting Friday of March of the immediately preceding financial year will be taken into account. The concerned banks will be called upon by NABARD, on receiving demands from various State Governments, to contribute to RIDF. 2. The period of deposit and interest rates on RIDF shall be fixed by RBI from time to time. 3. Details regarding operationalisation of the RIDF such as the amounts to be deposited by banks, interest rates on deposits, period of deposits, etc. are communicated to the concerned banks by RBI.
Cyclical Credit Product for Farmers RBI advised (Aug 28, 2008) that each commercial bank & RRB may select one rain fed district for introduction, on a pilot basis, of a new product for financing crop production whereby (a) 80% of the crop loan requirement of borrowers may be released through a short term production loan in conformity with the present norms/ practices and (b) the remaining 20% representing the core component (expenses for land preparation, presowing operations etc. besides self labour/ consumption) may be sanctioned as a clean credit limit to ensure year round liquidity. Banks may allow drawings in this limit on the pattern of operations in cash credit/ over draft accounts if the farmers continue to service interest. Asset classification norms as applicable to nonagricultural cash credit/ over draft accounts would apply to this clean credit limit.

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