'Lend directly to borrower in priority sector'

RBI Deputy Governor Chakrabarty says doing so through intermediaries is riskier, costlier

The Reserve Bank of India has said banks must lend directly to priority sector beneficiaries, not through intermediaries.

“Lending directly to the beneficiary will ensure the management of credit and help banks understand the risks associated with this. While routing money through financial institutions, it’s they who take the risk and not banks,” RBI Deputy Governor K C Chakrabarty said while addressing bankers.

He reasoned that if lending was done through intermediaries, the cost to the end-customer goes up as margins increase. Such lending through intermediaries was a risky affair, he said, and that was why RBI had taken away leeway from priority sector lending norms, except for the micro finance sector.

The central bank had formed a committee under the chairmanship of

M V Nair, former chairman of Union Bank of India, to review the priority sector norms. The committee had suggested continuing the present practice of banks needing to extend 40 per cent of their net bank credit (of the previous year) to the priority sector, of which 13.5 per cent needed to be disbursed directly to the agricultural sector.

The revised guidelines on priority sector lending were issued in July, to take effect right away. Foreign banks in India and having more than 20 branches are to be treated at par with domestic banks, according to the revised norms.

Banks, especially of foreign origin, have been making requests for more branches to meet priority sector norms. Chakrabarty, however, said banks did not need more branches. Instead, there was a need to innovate structures to enable effective flow of credit to the needy.

He added that priority sector norms were not devised to help banks achieve targets.

The guidelines were to ensure flow of credit to sectors that would otherwise not have access to a formal source of funding.

The deputy governor also said the time was appropriate for foreign banks to bring their expertise to financing of agriculture and small & medium enterprises. For agriculture, contributing 14 per cent of gross domestic product, the priority sector target lending target was reasonable, Chakrabarty said. Food inflation could only be controlled by ensuring better credit to agriculture, he added.

Deepak Parekh, chairman of the country’s largest mortgage lender, Housing Development Finance Corporation, had criticised the new priority sector guidelines, adding that “indirect lending to housing finance companies and most NBFCs no longer qualifies for priority sector lending”.

However, Chakrabarty said all banks do direct lending for homes, which was why RBI had taken away the sector from the priority sector guidelines. Under the new rules, housing loans below Rs 25 lakh to individuals in cities having a population of more than a million, and below Rs 15 lakh in cities having a population of less than a million, are classified as priority sector loans for banks.