FAQ on Priority Sector Lending

To meet the credit needs of large sections of the Indian poplulation who had no access to institutional finance, RBI has created an elaborate framework of Priority Sector Lending with mandated targets. Lets look at some of the Frequently Asked Question about the Priority Sector lending (taken from RBI website):

1. What are the targets under priority sector lending ?
Ans : The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below :

{note : NBC denotes net bank credit}
2. What constitutes net bank credit ?

The net bank credit should tally with the figure reported in the fortnightly return submitted under section 42(2) of the Reserve Bank of India Act, 1934. However, outstanding deposits under the FCNR(B) and NRNR Schemes are excluded from net bank credit for computation of priority sector lending target/ sub-targets.

3. What does the priority sector comprise ?

Ans : Broadly, the priority sector comprises the following :

1. Agriculture

2. Small scale industries (including setting up of industrial estates)

3. Small road and water transport operators (owning upto 10 vehicles).

4. Small business (Original cost of equipment used for business not to exceed Rs 20 lakh)

5. Retail trade (advances to private retail traders upto Rs.10 lakh)

6. Professional and self-employed persons (borrowing limit not exceeding Rs.10 lakh of which not more than Rs.2 lakh for working capital; in the case of qualified medical practitioners setting up practice in rural areas, the limits are Rs 15 lakh and Rs 3 lakh respectively and purchase of one motor vehicle within these limits can be included under priority sector)

7. State sponsored organisations for Scheduled Castes/Scheduled Tribes

8. Education (educational loans granted to individuals by banks)
9. Housing [both direct and indirect – loans upto Rs.5 lakhs (direct loans upto Rs 10 lakh in urban/ metropolitan areas), Loans upto Rs 1 lakh and Rs 2 lakh for repairing of houses in rural/ semi-urban and urban areas respectively].

10. Consumption loans (under the consumption credit scheme for weaker sections)

11. Micro-credit provided by banks either directly or through any intermediaty; Loans to self help groups(SHGs) / Non Governmental Organisations (NGOs) for onlending to SHGs

12. Loans to the software industry (having credit limit not exceeding Rs 1 crore from the banking system)

13. Loans to specified industries in the food and agro-processing sector having investment in plant and machinery up to Rs 5 crore.

14. Investment by banks in venture capital (venture capital funds/ companies registered with SEBI)

4. What constitutes ‘Direct Finance’ for Agricultural Purposes ?

Ans : Direct Agricultural advances denote advances given by banks directly to farmers for agricultural purposes. These include short-term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank.

Direct finance also includes medium and long-term loans (Provided directly to farmers for financing production and development needs) such as Purchase of agricultural implements and machinery, Development of irrigation potential, Reclamation and Land Development Schemes, Construction of farm buildings and structures, etc. Other types of direct finance to farmers includes loans to plantations, development of allied activities such as fishery, poultry etc and also establishment of bio-gas plants, purchase of land for agricultural purposes by small and marginal farmers and loans to agri-clinics and agri-business centres.

5. What constitutes ‘Indirect Finance’ to Agriculture ?

Indirect finance denotes to finance provided by banks to farmers indirectly, i.e., through other agencies. Important items included under indirect finance to agriculture are as under :

(i) Credit for financing the distribution of fertilisers, pesticides, seeds, etc.

(ii) Loans upto Rs. 25 lakhs granted for financing distribution of inputs for the allied activities such as, cattle feed, poultry feed, etc.

(iii) Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energising their wells.

(iv) Loans to State Electricity Boards for Systems Improvement Scheme under Special Project Agriculture (SI-SPA).

(v) Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained with NABARD.

(vi) Subscription to bonds issued by Rural Electrification Corporation (REC) exclusively for financing pump-set energisation programme in rural and semi-urban areas and also for financing System Improvement Programme (SI-SPA).

(vii) Subscriptions to bonds issued by NABARD with the objective of financing agriculture/allied activities.

(viii)Finance extended to dealers in drip irrigation/sprinkler irrigation system/agricultural machinery, subject to the following conditions:

(a) The dealer should be located in the rural/semi-urban areas.

(b) He should be dealing exclusively in such items or if dealing in other products, should be maintaining separate and distinct records in respect of such items.
(c) A ceiling of upto Rs. 20 lakhs per dealer should be observed.

(ix) Loans to Arthias (commission agents in rural/semi-urban areas) for meeting their working capital requirements on account of credit extended to farmers for supply of inputs.

(x) Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture.

6. What is the definition of ‘Small Scale Industries’ (SSI) ?

Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.

The investment limit of Rs.1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery and hand tools by the Government of India.

7. What is the definition of ‘Tiny Enterprises’ ?

The status of ‘Tiny Enterprises’ is given to all small scale units whose investment in plant & machinery is upto Rs. 25 lakhs, irrespective of the location of the unit.

8. What are ‘Small Scale Service & Business Enterprises’ (SSSBE’s) ?

Industry related service and business enterprises with investment upto Rs. 10 lakhs in fixed assets, excluding land and building will be given benefits of small scale sector. For computation of value of fixed assets, the original price paid by the original owner will be considered irrespective of the price paid by subsequent owners.

9. What does indirect finance in the small-scale industrial sector include?

Indirect finance to SSI includes the following important items:

1. Financing of agencies involved in assisting the decentralised sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries.
2. Finance extended to Government sponsored Corporation/organisations providing funds to the weaker sections in the priority sector.
3. Advances to handloom co-operatives.
4. Term finance/loans in the form of lines of credit made available to State Industrial Development Corporation/State Financial Corporations for financing SSIs.
5. Funds provided by banks to SIDBI/SFCs by way of rediscounting of bills.
6. Subscription to bonds floated by SIDBI, SFCS, SIDCS and NSIC exclusively for financing SSI units.
7. Subscription to bonds issued by NABARD with the objective of financing exclusively non-farm sector.
8. Financing of NBFCS or other intermediaries for on-lending to the tiny sector.
9. Deposits placed with SIDBI by Foreign Banks in fulfilment of shortfall in attaining priority sector targets.
10. Bank finance to HUDCO either as a line of credit or by way of investment in special bonds issued by HUDCO for on-lending to artisans, handloom weavers, etc. under tiny sector may be treated as indirect lending to SSI (Tiny) Sector.

10. What type of investments made by banks are reckoned under priority sector ?

Investments made by the banks in special bonds issued by the specified institutions could be reckoned as part of priority sector advances, subject to the following conditions:

1. State Financial Corporations (SFCs)/State Industrial Development Corporations (SIDCs)

Subscription to bonds exclusively floated by SFCs & SIDCs for financing SSI units will be eligible for inclusion under priority sector as indirect finance to SSI.

2. Rural Electrification Corporation (REC)

Subscription to special bonds issued by REC exclusively for financing pump-set energisation programme in rural and semi-urban areas and the System Improvement Programme under its Special Projects Agriculture (SI-SPA) will be eligible for inclusion under priority sector lending as indirect finance to agriculture.

3. NABARD

Subscription to bonds issued by NABARD with the objective of financing exclusively agriculture/allied activities and the non-farm sector will be eligible for inclusion under the priority sector as indirect finance to agriculture/ SSI, as the case may be.

4. Small Industries Development Bank of India (SIDBI)

Subscriptions to bonds exclusively floated by SIDBI for financing of SSI units will be eligible for inclusion under priority sector as indirect finance to SSIs.

5. The National Small Industries Corporation Ltd. (NSIC)

Subscription to bonds issued by NSIC exclusively for financing of SSI units will be eligible for inclusion under priority sector as indirect finance to SSIs.

6. National Housing Bank (NHB)

Subscription to bonds issued by NHB exclusively for financing of housing, irrespective of the loan size per dwelling unit, will be eligible for inclusion under priority sector advances as indirect housing finance.

7. Housing & Urban Development Corporation (HUDCO)

Subscription to bonds issued by HUDCO exclusively for financing of housing, irrespective of the loan size per dwelling unit, will be eligible for inclusion under priority sector advances as indirect housing finance.

Investment in special bonds issued by HUDCO for on-lending to artisans, handloom weavers, etc. under tiny sector will be classified as indirect lending to SSI (Tiny) sector.

11. What are the weaker sections within the priority sector ?

The weaker sections under priority sector include the following:

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 Swarnjayanti Gram Swarojgar Yojana (SGSY)
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 Scavangers (SLRS)
8. Self Help Groups (SHGs)

12. What action is taken in the case of non-achievement of priority sector lending target by a bank ?

1. Domestic scheduled commercial banks having shortfall in lending to priority sector / agriculture are allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established in NABARD. Details regarding operationalisation of the RIDF such as the amounts to be deposited by banks, interest rates on deposits, period of deposits etc., are decided every year after announcement in the Union Budget about setting up of RIDF.
2. In the case of foreign banks operating in India which fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent per annum.

13. Whether there is any time limit for disposal of loan applications ?

All loan applications upto a credit limit of Rs. 25,000/- should be disposed of within a fortnight and those for over Rs. 25,000/- within 8 to 9 weeks.

14. What is the rate of interest for loans under priority sector ?

As per the current interest rate policy, in the case of loans upto Rs 2 lakh, the interest rate should not exceed the prime lending rate (PLR) of the bank, while in the case of loans above Rs 2 lakh, banks are free to determine the interest rate.

15. How is priority sector lending monitored by the Reserve Bank ?

Priority sector lending by commercial banks is monitored by Reserve Bank of India through periodical Returns received from them. Performance of banks is also reviewed in the various fora set up under the Lead Bank Scheme (at State, District and Block levels).