RBI to review new rules for priority sector lending

The Reserve Bank of India (RBI) has agreed to review the revised priority sector lending targets with an “open mind” over the next fortnight, Governor D Subbarao said on Tuesday.

The announcement follows requests from banks to review the new norms.

“Evidently, there are still some open issues on priority sector lending.... I think some of the suggestions were quite reasonable. We decided that in the next 15 days, there will be a meeting at the operational level and (another) meeting at the bank chairmen level. It is not clear what we will change but, certainly, we will have an open mind,” Subbarao told reporters after the first quarter review of monetary policy for 2012-13.

IN NUMBERS
Currently, four foreign banks in India have more than 20 branches

• Standard Chartered Bank: 94 branches 
• Hongkong & Shanghai Banking Corporation: 50 branches 
• Citibank: 42 branches 
• Royal Bank of Scotland: 31 branches

The banking regulator had set up a committee led by M V Nair, former chairman and managing director of Union Bank of India, to examine the guidelines on priority sector lending. Earlier this month, RBI released the revised sector lending norms, based on the recommendations made by the Nair committee.

The new norms mandated a higher priority sector lending target for foreign banks with more than 20 branches in India.

These banks will now have to lend 40 per cent of their net credit to priority sectors, instead of 32 per cent. They will also have sub-targets and get five years (from April 2013) to meet the new guidelines.

Foreign banks have been grappling with the revised rules, as they do not have adequate presence in rural areas to meet the new targets.

According to bankers, foreign lenders that have less than 20 branches might re-work their expansion strategy in India to avoid higher priority sector lending targets. Subbarao said: “The chairman of one of the foreign banks said, quite thoughtfully, that, look, having 20 branches becomes a cost threshold. Once you become 20 or 21, you inherit all the cost.”

The governor said bankers have also questioned the stiff direct agriculture lending target of 13.5 per cent.

They have argued that the farm sector might not have the capacity to absorb that much of credit.

There was a lack of clarity on the interest rate ceiling on priority sector credit lent through intermediaries.

“There were suggestions made by banks and we will have to take a view. I do not want to pronounce anything now,” Subbarao said.