IN THE CLASSROOM-THE ECONOMIC TIMES-28-7-2012

Lending to Priority Sectors

WHAT IS PRIORITYSECTOR LENDING?
Banks are assigned a special role in the economic development of the country, besides ensuring growth of the financial sector. Hence the Reserve Bank of India has prescribed that a portion of bank lending should be for the development of certain segments, which it calls priority sectors.

WHICH SECTORS QUALIFY AS PRIORITY SECTORS?

It essentially includes lending to agriculture, small and tiny enterprises and the export sector. Many other areas such as low-cost housing, loans to backward classes, education loans and microfinance too now qualify for the tag. The RBI revises the definition of priority sector from time to time depending on the development needs of the economy.

ARE THERE MINIMUM LIMITS?

The limits are prescribed according to the ownership pattern of the banks. Local banks both public and private sector have to lend 40% of their advances to the priority sector. For foreign banks, the limit was 32% of their advances until recently. But last week, RBI said foreign banks with more than 20 branches in the country have to lend 40% of advances to the priority sector. There are also sub-limits for different sectors. For example, PSU banks have to lend 18% of their advances to agriculture.

DO BANKS MISS TARGETS?

While most banks often meet the overall target, they sometimes tend to miss the sub targets. This is particularly true in the case of domestic banks, which fail to meet the agricultural lending target. Banks say recovery is often difficult in this sector.

DOES MISSING PRIORITY SECTOR TARGET ATTRACT A PENALTY?

Domestic banks failing to achieve the lending targets have to contribute to the Rural Infrastructure Development Fund set up under Nabard. In the case of foreign banks, an amount equivalent to the shortfall is required to be deposited with Sidbi for a year. GAYATRI NAYAK