Priority Sector Lending

Topics: Debt, Interest, Bank Pages: 7 (2499 words) Published: February 9, 2012
Some areas or fields in a country depending on its economic condition or government interest are prioritized and are called priority sectors i.e. industry, agriculture. These may further be sub divided. Banks are directed by the state bank of the country that loans must be given on reduced interest rates with discounts to promote these fields. Such lending is called priority sector lending. The different segments of the priority sector are as follows: 1.      Agriculture

2.      Small Scale Industries
3.      Small Road and Water Transport Operators
4.      Retail Trade
5.      Small Business
6.      Professional and Self-employed persons
7.      Education
8.      Housing Finance
Priority Sector Lending BY RBI

The Government of India through the instrument of Reserve Bank of India (RBI) mandates certain type of lending on the Banks operating in India irrespective of their origin. RBI sets targets in terms of percentage (of total money lent by the Banks) to be lent to certain sectors, which in RBI's perception would not have had access to organized lending market or could not afford to pay the interest at the commercial rate. This type of lending is called Priority Sector Lending. Financing of Small Scale Industry, Small business, Agricultural Activities and Export activities fall under this category. This is also called directed credit in Indian Banking system. Financing Priority Sector in the economy is not strictly on commercial basis as not only the general approach is liberal but also the rate of interest charged on such loans is less. Export finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian corporate. Part of the cost of this concession is borne by RBI by means of refinancing such loans at concessional rate. Indian Banks, therefore, contribute towards economic development of the country by subsidizing the business activities undertaken by entrepreneurs in the areas which are considering "priority sector" by RBI.

The Reserve Bank of India (RBI) has issued revised guidelines on priority sector lending by the commercial banks in which it has revised the eligibility criteria. In the revised guideline, RBI has decided to include those sectors as a part of the priority sector, that impact large section of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises. It has maintained the overall priority sector lending limit at 40% of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposure (whichever is higher) for domestic commercial banks and 32% for foreign banks. 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 :  | Domestic banks (both public sector and private sector banks) | Foreign banks operating in India| Total Priority Sector advances| 40 percent of NBC| 32 percent of NBC| Total agricultural advances| 18 percent of NBC| No target| SSI advances | No target| 10 percent of NBC|

Export credit| Export credit does not form part of priority sector | 12 percent of NBC| Advances to weaker sections| 10 percent of NBC| No target| {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...
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