The banking system's priority sector lending obligation is set to increase by over Rs 50,000 crore (Rs 500 billion) with the Reserve Bank of India on Wednesday suggesting expansion in the base for calculating the level of directed lending. The suggestion will also hit some of the foreign banks with mostly investment banking presence in India.
So far, a bank's exposure to the priority sector - agriculture, small scale industries, small businesses, micro-credit, education loans and housing loans up to Rs 15 lakh (Rs 1.5 million) -- is capped at 40 per cent of its net credit.
In its revised draft guidelines issued today, the RBI added repatriable as well as non-repatriable foreign currency deposits by non-residents and banks' investments in non-SLR bonds categorised as held to maturity to net bank credit, enlarging the base on which priority sector lending targets are set.
The guidelines say the basis for calculation of the priority sector lending obligation will be either net bank credit or credit equivalent of off-balance sheet items, whichever is higher.
The off-balance sheet items include letters of credit and derivatives transactions. This provision will impact those foreign banks that have negligible direct credit exposure but huge off-balance sheet exposure.
Indian banks will be required to lend to the priority sector up to 40 per cent of their adjusted net bank credit or credit equivalent of off-balance sheet exposures, whichever is higher. For foreign banks, the target is 32 per cent.
The foreign currency non-resident-bank (FCNR-B) deposits and non-resident non-repatriable deposits amount to about $13 billion and banks' investments in non-SLR investments total about Rs 62,000 crore (Rs 620 billion).
In order to encourage banks to increasingly lend directly to priority sector borrowers, the revised guidelines say banks' deposits placed with the National Bank for Agriculture and Rural Development and the Small Industries Development Bank of India on account of non-achievement of priority sector lending targets would not be eligible for classification as indirect finance to agriculture or small scale industries.
Micro-credit of up to Rs 50,000 has been included in the priority sector for the first time. It is provision of credit and other financial services to the poor in rural, semi-urban and urban areas.
The central bank has also proposed redefinition of exposure to small scale industries, which will qualify for priority sector lending.
Exposure to units engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery does not exceed Rs 5 crore (Rs 50 million) will be considered as small scale industries against Rs 1 crore (Rs 10 million) now.
