The Reserve Bank of India (RBI) on Friday brought financing of start-ups under the priority sector lending (PSL) category of the banking sector, proposed more credit flow to districts with lower PSL, and doubled loan limits for renewable energy and health infrastructure “to align it with emerging national priorities and bring sharper focus on inclusive development.”
In a bid to address regional disparities in the flow of priority sector credit, the RBI, in its revised PSL guidelines, decided to rank districts on the basis of per capita credit flow to the priority sector, and build an incentive framework for districts with lower flow of credit and a disincentive framework for districts with higher flow of priority sector credit.
Accordingly, from FY 2021-22 onwards, a higher weight (125 per cent) would be assigned to the incremental priority sector credit in the identified districts where the per capita PSL is less than Rs 6,000, and a lower weight (90 per cent) would be assigned for incremental priority sector credit in the identified districts where the per capita PSL is more than Rs 25,000.
As many as 184 districts with low per capita PSL credit flow will benefit from the RBI move. A higher credit flow to the rural sector is expected to boost rural spending at a time when GDP growth has contracted by 23.9 per cent in the June quarter.
Targeting the flow of credit
The RBI move, which comes at a time when credit growth has remained sluggish at 6.7% and GDP for the first quarter contracted by 23.9%, is aimed at enabling better credit penetration to credit deficient areas, increasing the lending to small and marginal farmers and weaker sections and boosting credit to renewable energy and health infrastructure.
The RBI has also brought loans to farmers for installation of solar power plants for solarisation of grid-connected agriculture pumps, and loans for setting up compressed bio gas (CBG) plants as fresh categories eligible for finance under the priority sector.
In a push to the start-up sector, the central bank said loans up to Rs 50 crore can be availed by start-ups — as per the definition of the Ministry of Commerce and Industry — that are engaged in activities other than agriculture or micro, small and medium enterprises (MSMEs).
Commercial banks, including foreign banks, are required to mandatorily earmark 40 per cent of the adjusted net bank credit for priority sector lending. Regional rural banks and small finance banks will have to allocate 75 per cent of adjusted net bank credit to PSL.
The central bank said the changes “will enable better credit penetration to credit deficient areas, increase the lending to small and marginal farmers and weaker sections and boost credit to renewable energy, and health infrastructure”.
Doubling the loan limits for renewable energy, the RBI has said bank loans up to a limit of Rs 30 crore to borrowers for purposes like solar-based and biomass-based power generators, windmills, micro-hydel plants, and non-conventional energy-based public utilities – such as street lighting systems and remote village electrification — will be eligible for priority sector classification. For individual households, the loan limit will be Rs 10 lakh per borrower, the RBI said in a notification to commercial banks.
The RBI has doubled the credit limit for improvement of health infrastructure, including those under Ayushman Bharat. Bank loans up to a limit of Rs 5 crore per borrower for setting up schools, drinking water facilities, and sanitation facilities including the construction and refurbishment of household toilets and water improvements at household level; and up to a limit of Rs 10 crore per borrower for building healthcare facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres, have been allowed.
The RBI said it has increased the targets prescribed for small and marginal farmers, and weaker sections. “The applicable target for lending to the non-corporate farmers for FY 2020-21 will be 12.14 per cent of the adjusted net bank credit or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) whichever is higher. All efforts should be made by banks to reach the level of 13.5 per cent of ANBC (erstwhile target for direct lending to agriculture sector),” it said.
While the rate of interest on PSL varies from sector to sector, it’s considered cheaper and more accessible when compared to normal loans. The rate of interest on bank loans will be as per directives issued from time to time by the Department of Banking Regulation of the RBI. Priority sector guidelines do not lay down any preferential rate of interest for priority sector loans.
The RBI said a higher credit limit has been specified for farmers producers organisations (FPOs) and farmers producers companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. Loans for these activities will be subject to an aggregate limit of Rs 2 crore per borrowing entity.
The RBI said it has comprehensively reviewed the PSL guidelines to align it with emerging national priorities, and bring sharper focus on inclusive development, after having wide-ranging discussions with all stakeholders.
“Revised PSL guidelines will enable better credit penetration to credit deficient areas, increase the lending to small and marginal farmers and weaker sections and boost credit to renewable energy and health infrastructure,” the RBI said.
According to the RBI, to address regional disparities in the flow of priority sector credit, higher weightage has been assigned to incremental priority sector credit in “identified districts” where priority sector credit flow is comparatively low.
It has defined farmers with landholding of up to one hectare as marginal farmers, and farmers with a landholding of more than one hectare and up to 2 hectares as small farmers.
The RBI last week said on a year-on-year (Y-o-Y) basis, non-food bank credit growth at 6.7 per cent in July 2020 was lower than the growth of 11.4 per cent in July 2019.
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