RBI raps banks for misreporting loans to priority sector

Flagging the issue of misreporting of priority sector lending (PSL) performance by banks, the Reserve Bank of India (RBI) on Friday said loans wrongly classified as PSL would be included in the shortfall under priority sector targets.

The annual financial inspection of books has shown instances of misclassification of loans under priority sector. Such misreported loans in the current financial year would be added to the shortfall reported on the last reporting Friday of the following year for allocation to various funds, RBI said in a communication to banks. Also, banks buy priority sector loans from intermediaries like microfinance institutions and non-banking finance companies.

Banks reckon the present value of these loans by discounting them at their lending rate, which is typically much lower than the actual rate charged to end–borrowers by such intermediaries. Such practice leads to overstating of the actual amount of priority sector loans to the extent of the premium paid by banks to such intermediaries.

Hence, must report the nominal amount actually disbursed to end priority sector borrowers and not the premium-embedded amount paid to the intermediaries.