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Priority sector norms set to be reviewed

Announcement likely in Budget; more flexibility to foreign banks on cards

Manojit Saha & Nupur Anand  |  Mumbai 

To offer more flexibility to lenders, the Reserve Bank of India (RBI) is set to revise the in order to make the targets more achievable for

A formal announcement on the issue will be made by Minister Arun Jaitley during the Budget speech. The new norms are expected to give more flexibility, particularly to foreign that are constraint by branch presence to meet their targets.
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had set up an internal committee, headed by a chief general manager from the department of banking regulation (DBR), to review the changes that were required. According to sources, the banking regulator and the ministry have discussed the issues that need to be addressed.

It is likely the definition of priority sector will be expanded. At present, lending to sector — both direct and indirect — constitutes priority sector lending. It is proposed the entire gamut of agricultural development activity, like construction dams, canals and rural roads, be considered under the priority sector.

Moreover, have also been demanding overall  lending to sectors like be included under the ambit of priority sector. This is because the quantum of loans is higher under as compared to and, therefore, it will be much easier for to meet the norms.

have also asked the amount of loans that qualify as PSL under housing be raised by at least Rs 10 lakh. Currently, loans to individuals up to Rs 25 lakh in metropolitan centres with population above one million and Rs 15 lakh in other centres for purchase/construction of a house per family excluding loans sanctioned to bank’s own employ qualifies as priority sector lending.

Currently, under PSL obligation, are required to lend 40 per cent of their adjusted net bank credit of the previous year to sectors such as-agriculture, micro and small enterprise, housing and education, among others. Of the 40 per cent, 18 per cent is the target for of which 13.5 per cent needs to be for direct

If a bank fails to meet its target, it invests in low-yielding assets like funds with the National Bank of Agricultural and Rural Development’s Rural Development Fund (RIDF).

With expansion of the definition of the priority sector, investment in RIDF will not be considered under PSL. It is argued RIDF investments are intended only to address non-compliance and also the proceeds are made available to state governments, which are not credit constrained and could raise money from market sources.

Relaxation in PSL norms will also provide a much needed breather to foreign It is proposed that credit facilities such as bonds or Pass-Through Certificates should be permitted to be held in the books of a bank. Foreign lenders are expected to benefit if this proposal is implemented.

The changes in PSL norms could pave the way for the foreign lenders to take up the wholly owned subsidiary (WOS) route in India. This has been one of the biggest reservations of lenders who are looking at converting their branches into a WOS, as they believe it won’t be commercially viable.

First Published: Wed, February 25 2015. 00:21 IST
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