ACA-TM-37 (v Nov-10 ) 1 PRIORITY SECTOR LENDING S THOMAS PUNNOOSE MEMBER OF FACULTY RBI, CAB, PUNE

ACA-TM-37 (v Nov-10 ) 2 Lending to the Priority Sector BANK Financial Intermediation Operational Efficiency Allocational Efficiency

ACA-TM-37 (v Nov-10 ) 3 Sectoral composition of GDP YearAgricultureIndustriesServicesTotal percent

ACA-TM-37 (v Nov-10 ) 4 Outstanding Credit of Scheduled Commercial Banks (according to occupation) At endAgricultureIndustriesServicesTotal December June March March March percent

ACA-TM-37 (v Nov-10 ) 5 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 structures, products and processes New Priority Sector Guidelines – Basic Philosophy

ACA-TM-37 (v Nov-10 ) 6 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 Priority Sector Classification - Wrong notions

ACA-TM-37 (v Nov-10 ) 7 Categories under Priority Sector 1.Agriculture 2. Micro & Small enterprises 3. Education 4. Housing 5. Export Credit 6. Others 7

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99 CategoriesDomestic 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 of Off-Balance Sheet exposure, whichever is higher 32% of ANBC or credit equivalent amount of Off- Balance Sheet Exposures whichever is higher Total Agriculture 18% but Indirect lending > 4.5% will not be reckoned for computing achievement under 18% target No specific target. Forms part of total priority sector Micro and Small Enterprises 40% of total advances to MSE to : -Micro (Mfg) with P/M upto Rs.5 lakh - 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 No specific target. Forms part of total priority sector Export CreditNot a separate category. Export credit to eligible activities under agriculture and MSE will be reckoned for Priority Sector No specific target. Forms part of total priority sector Advances to Weaker Sections 10% of ANBC or credit equivalent amount of Off-Balance Sheet Exposure whichever is higher No specific target in the total priority sector

ACA-TM-37 (v Nov-10 ) 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 10

ACA-TM-37 (v Nov-10 ) 11 Computation of ANBC 11 Bank Credit in India (as prescribed in item No. VI of Form ‘A’ [Special Return as on March 31 st ] under Sec 42 (2) of RBI Act, 1934 I Bills rediscounted with RBI and other approved Financial InstitutionsII Net Bank CreditIII (I – II) Investments in Non-SLR categories under HTM Category + other investments eligible to be treated as priority sector IV Adjusted Net Bank Credit (ANBC)III + IV Banks should not deduct / net any amount like provisions, accrued interest etc from NBC

ACA-TM-37 (v Nov-10 ) 12 Agricultural Credit Target fixed by the Government of India for is Rs.5,75,000 crore

ACA-TM-37 (v Nov-10 ) 13 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 (v Nov-10 ) 14 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 (v Nov-10 ) 15 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 (v Nov-10 ) 16 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 development loans for allied activities)

ACA-TM-37 (v Nov-10 ) 17 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 (v Nov-10 ) 18 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 (v Nov-10 ) 19 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 (v Nov-10 ) 20 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 (v Nov-10 ) 21 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. 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 (v Nov-10 ) 22 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 sectorcomply with caps on margin and interest rates as also other pricing guidelines - Banks should obtain from MFI at the end of each quarter a CA’s certificate CA’s certificate

ACA-TM-37 (v Nov-10 ) 23 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 1 st 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 (v Nov-10 ) 24 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 (v Nov-10 ) 25 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 (v Nov-10 ) 26 Other Indirect Agriculture: Loans to NGOs which are SHG Promoting institutions for on- lending 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

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ACA-TM-37 (v Nov-10 ) 28 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 (v Nov-10 ) 29 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 (v Nov-10 ) 30 MSE – Direct Finance Manufacturing Enterprises: MSEs engaged in the manufacture/production of goods to any industry specified in the 1 st Schedule to Industries (Development & Regulation) Act, 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 (v Nov-10 ) 31 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 of producers in the decentralized sector viz., artisans, village and cottage industries Loans sanctioned by banks to MFIs for on-lending to MSE sector as per conditions specified earlier

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ACA-TM-37 (v Nov-10 ) 33 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.

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ACA-TM-37 (v Nov-10 ) 35 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 semi- urban areas and up to Rs. 5 lakh in urban and metropolitan areas

ACA-TM-37 (v Nov-10 ) 36 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 (v Nov-10 ) 37 Housing loans Bank loans to HFCs, approved by NHB for their refinance, for onlending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum 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 (v Nov-10 ) 38 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 borrower- wise details of the underlying portfolio.

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ACA-TM-37 (v Nov-10 ) 40 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

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ACA-TM-37 (v Nov-10 ) 42 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 farmers- already 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 (v Nov-10 ) 43 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

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ACA-TM-37 (v Nov-10 ) 45 Weaker Sections Category Small (landholding more than 1 hectare but less than 2 hectares) and Marginal farmers (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 (v Nov-10 ) 46 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

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ACA-TM-37 (v Nov-10 ) 48 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 (v Nov-10 ) 49 Existing Framework of MIS Branches Block Coordinator District Coordinator State Controlling Offices HOIBARPCD-CORPCD-ROSLBCRPCD-RONABARDLDMsSLBC

ACA-TM-37 (v Nov-10 ) 50 Returns presently furnished by banks NoReturns submitted toSubmitted byNo. of returns 1.RBI- RPCDSCB RRBs Cooperative Banks RBI-DSIMSCB7 Basic Statistical Returns 3.NABARDRBI IBA SLBC LDM RRB Cooperative Banks Multiple Returns to monitor the performance of SCBs and supervisory returns for RRBs and Cooperative Banks 4.IBASCB4 5.SLBCLDM SCB – Controlling Offices Differs from State to State 6.Government DepartmentsRBI SLBC NABARD Varies from time to time

ACA-TM-37 (v Nov-10 ) 51 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 (v Nov-10 ) 52 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 (v Nov-10 ) 53 BranchesHOCDRSRBI-DSIMRBI-RPCDNABARDSLBCLDM Transactional Data Proposed Final Framework under CDRS Validation Processing and Generation of Reports

ACA-TM-37 (v Nov-10 ) 54 Timeframe to implement the new approach 1 st Phase: creation of CDRA and preparing the banking system for moving towards PSMIS 2 nd Phase: setting up of CDRS, release of PSMIS codes, issue of revised guidelines 3 rd Phase: to put in place a secured way of capturing the data from the base system of banks 4 th Phase: CDRA to complete implementation of CDRS

ACA-TM-37 (v Nov-10 ) 55 BranchesHORPCD-COSLBCLDMNABARD Transactional Data An interim solution Processing and report based submission Processing and Compilation

ACA-TM-37 (v Nov-10 ) 56 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

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ACA-TM-37 (v Nov-10 ) 58 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 (v Nov-10 ) 59 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 (v Nov-10 ) 60 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 (v Nov-10 ) 61 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 (v Nov-10 ) 62 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 (v Nov-10 ) 63 THANK YOU