Most foreign banks operating in India will escape the new priority sector lending norms rolled out by the Reserve Bank of India on Friday. These banks with less than 20 branches will continue to lend 32 per cent of their credit to the priority sector instead of 40 per cent for larger banks and will also not be asked to adhere to further sub-classification.
For other banks RBI has brought in educational loans up to Rs 10 lakh and housing loans up to Rs 25 lakh in big cities under priority sector lending.
This can reduce the rate of interest on these loans making life easier for a lot of people. In addition,it has allowed individuals to take overdrafts of up to Rs 50,000 from their no-frills account. The changes aim to make banks more competitive against the non-banking finance companies and housing finance companies.
In addition more activities including loans to micro units and to food and agro processing units will also figure in the lending to the priority sector. The revised guidelines aim at implementing the essence of recommendations of Nair Committee without dismantling the established and accepted structure of priority sector lending, the RBI guidelines said.
The revised guidelines are based on the MV Nair committee recommendations to recast priority sector lending. RBI has retained the overall target under priority sector at 40 per cent as suggested by the Nair Committee and the targets under both direct and indirect agriculture at 13.5 per cent and 4.5 per cent respectively while refocusing the direct agricultural lending to individuals,self help groups and joint liability groups directly by banks.
But analysts said the thresholds for individuals to qualify as priority sector candidates were too low to make a difference in major urban areas.
Bank loans to primary agricultural credit societies,farmers service societies and large adivasi multi-purpose co-operative societies ceded to or managed/controlled by such banks for on-lending to farmers for agricultural and allied activities are included under direct agriculture,will also be part of the new norms,the RBI document notes.
The guidelines have a big plus for foreign banks with less than twenty branches. Lets hope some of them will demonstrate the will and ability to go beyond export advances. For others,caps on indirect advances,low thresholds and interest rate caps will continue to pose challenges. Flexibility on distribution channels and higher limits on agricultural infrastructure would have helped both the banks and the rural economy said Shinjini Kumar,banking sector analyst at PwC.