Foreign banks must raise targets: Panel

M V Nair Committee moots sub-targets for foreign lenders - 15% for exports and 15% for small and micro-enterprises

Foreign banks may soon have to bring their targets for lending to the priority sector on a par with the targets of domestic banks. The M V Nair Committee, constituted for re-examining and suggesting revised guidelines for priority sector lending, has said it is time the differential treatment between foreign and domestic lenders on priority sector lending is brought to an end.

“Foreign banks operating in India have been given differential treatment in allocating targets since the inception of priority sector guidelines. Considering the principle of reciprocity, foreign banks are expected to comply with priority sector target/sub-targets applicable to domestic banks,” the report said. The panel also recommended sub-targets of 15 per cent for exports and 15 per cent for small and micro-enterprises, within which seven per cent was for micro enterprises, for foreign banks.

While releasing the Nair Committee report, the Reserve Bank of India sought feedback from all stakeholders by March 31.

Currently, domestic scheduled commercial banks are mandated to lend 40 per cent of adjusted net bank credit (ANBC) to the priority sector. If the panel’s recommendations are implemented, priority sector lending by foreign banks would rise from 32 per cent of net credit to 40 per cent.

Keeping in view the small network of foreign bank branches, the committee recommended the introduction of priority sector lending certificates (PSLC) on a pilot basis to help the banks meet targets. “This can be another option in addition to the rural infrastructure development fund, in case banks are not able to meet the targets on their own. Banks whose priority sector lending is above the target would be able to help banks that don’t. Since the rates are negotiable, it would be an incentive to those who have achieved minimum requirements,” said Nair, chairman and managing director, Union Bank of India, and chairman of the committee.

“The objective of reaching out to a large number of small and marginal farmer households and micro-enterprises in a defined timeframe may be supplemented by allowing bank loans to non-bank financial intermediaries for on-lending to specified segments to be reckoned for classification under priority sector, up to a maximum of five per cent of ANBC,” the committee said. It also suggested local banks should give nine per cent of their net bank credit to small and marginal farmers by 2015-16, albeit in stages.

The panel appointed by the regulator said the demarcation between lending to agriculture and lending to allied sectors should be done away with. “As there is a seamless interconnectedness of the entire agriculture value chain, its impact on output, income and employment in the rural economy is highly positive. Therefore, ‘agriculture and allied activities’ may be a composite sector within the priority sector by doing away with distinction between direct and indirect agriculture lending,” the report said. The targets for agriculture and allied activities were kept at 18 per cent of ANBC.

Priority sector loans to women could be counted as loans given to weaker sections, the committee said. Amid several government-sponsored schemes that have a substantial discount component, the relevance of differential interest rate schemes for intended beneficiaries was questioned. “Differential rate of interest (DRI) scheme, operational since 1972 and intended to benefit specified segments of beneficiaries, has become obsolete. The major reasons are relatively lower quantum of loans available under the scheme and the absence of a subsidy component, compared to other government-sponsored schemes,” the panel said. Considering these, the committee recommended the DRI scheme may be dispensed with.

Though lending to microfinance institutions continues to be priority sector lending, gold loan companies, were excluded.This would help foreign banks that have limited reach, Nair said.

“The recommendations, once accepted, could be frozen for five years,” he added.