Banks want farm targets delinked from infra loans

RBI declines to loosen exposure limit rules for core sector lending.

Banks have a dilemma. They want to step up lending to the infrastructure sector but don’t want to allocate more resources for farm lending. However, rules link the two.

For every rupee that a bank lends, it has to set aside 40 paise for the priority sector, comprising segments such as agriculture, small and medium enterprises and small-ticket housing loans. Of the 40 per cent adjusted net bank credit for the priority sector, nearly half has to be used to give farm loans.

During their post-credit policy meeting with Reserve Bank of India officials on Friday, bankers demanded that they be exempted from setting aside funds for agricultural lending as a condition for incremental loan flow to infrastructure projects.

During 2008-09, 13 out of 27 public sector banks had failed to meet their agricultural lending obligation, although all but one (Central Bank of India) met the overall 40 per cent priority sector lending target. Among private sector banks, 15 of the 22 lenders did not meet their farm loan obligation.

With bank loan growth hitting the lowest level in a decade, lenders are banking on the infrastructure sector to drive credit flow. The Planning Commisison has estimated $500 billion (Rs 23.5 lakh crore) investment for roads, ports, power and railway between 2007 and 2012. While overall year-on-year loan growth was around 14 per cent till the middle of January, growth in credit for infrastructure projects was 42 per cent. At the end of January, core sector loans accounted for 9.3 per cent of the banks’ total advances. Banks have indicated a huge pipeline of undisbursed loans till the end of December. While State Bank of India (SBI) has indicated that the gap between sanctions and disbursement is about Rs 50,000 crore, Bank of Baroda and Bank of India have Rs 30,000-Rs 35,000 crore in the sanction pipeline. Union Bank of India has over Rs 20,000 crore of undisbursed loans.

With most sanctioned loans meant for the infrastructure sector, banks have been requesting the central bank to relax the rules on single borrower and group exposure limits. However, RBI has declined, saying exposure limits are already high compared with global standards.

“Clearly, the way forward is to resort to a number of ways in which it is possible to meet the requirements of infrastructure without violating the exposure norms and there are already ways to do it, including syndication, corporate bonds, securitisation.... These are some of the ways in which it is possible to meet the demand of infrastructure,” Usha Thorat, deputy governor of RBI said in a conference call with analysts and researchers today when asked whether RBI would relax core sector exposure norms.