RBI gets tough on priority loans

The Reserve Bank of India (RBI) has proposed to penalise banks failing to meet priority sector lending obligations.

The penalties for non-achievement of priority sector targets and sub-targets would be levied when banks file for regulatory clearances and approvals for various purposes, RBI said in its revised draft guidelines on priority sector lending.

Bank officials said the insertion of penal provision, which did not exist in the first draft, speaks of the central bank's seriousness in ensuring banks don't get away with shortfalls in lending obligations.

Banks face the prospect of their applications for various purposes, including branch licences getting stuck at the RBI for non-achievement of priority sector lending targets, several bankers said.

All public sector banks, except State Bank of India (SBI) and State Bank of Patiala, were able to meet the priority sector target of 40 per cent of net bank credit in 2005-06. 
 

GROWING NUMBERS Credit to the priority sector (Rs crore)
Category	Outstanding as on
	Mar 21, '03	19 Mar, '04	Mar 18, '05	Mar 31, '06
Agriculture	73,518	90,541	1,25,250	1,72,292
Growth (in %)	20.70	24.70	40.30	33.70
Small scale industries	60,394	65,855	74,588	90,239
Growth (in %)	21.00	23.20	35.10	37.60
Other priority sector	77,697	1,07,438	1,81,638	2,47,379
	35.60	38.30	61.80	36.20
Priority sector (total)	2,11,609	2,63,834	3,81,476	5,09,910
	20.70	24.70	40.30	33.70
Note: Due to reclassification of sectors and increase in coverage of banks, data for 2004-05 (47 banks)are not strictly comparable to those of 2005-06 (52 banks)

However, only 10 public sector banks met the 18 per cent sub-target for agriculture and eight banks fulfilled the target for lending to weaker sections. None of the private sector banks could meet sub-target for lending to agriculture and weaker sections, barring the erstwhile Ganesh Bank of Kurundwad.

Foreign banks' lending to the priority sector constituted 34.6 per cent of net bank credit against the target of 32 per cent, but they fell short of the 10 per cent sub-target for lending to small scale industries.

Export finance at 19.4 per cent of net bank credit was the largest chunk of its lending to priority sector, significantly above the prescribed sub-target of 12 per cent.

The RBI has also made a slight variation in classification of housing loans as priority sector lending. Housing loans up to Rs 15 lakh per family are proposed to be considered and not per borrower.

Bankers said the RBI has done this as availing of a second home loan by an existing borrower or by his spouse is considered as speculative investment.