Priority Sector Advances in Indian Banking

Priority Sector Advances in Indian Banking

Commercial Banking

PGP 2007-09

Term III, March-April 2008

Priority Sector Advances

Commercial Banking 2007 2

Chapter # 6

• Priority Sector broadly comprises

1. Agriculture

2. Small Scale Industries

3. Others – Small Businesses, Retail Trade, Small Transport Operators, Professional and Self Employed Persons, Housing Loans, Educational Loans, Micro Credit, etc.



Background• National Credit Council – July 1968• Lead Bank Scheme – 1969 (all 580 districts)• Nationalisation of 14 Commercial Banks• Description of PS formalised in 1972

(Informal Study Group on Statistics)• Initially, no specific targets fixed • November 1974 – RBI Guidelines to Banks

to raise the share of finance to PS in aggregate advances to 33 1/3% by Mar 1979



Developments

• March 1980 – Priority Sector Advances target raised to 40% by March 1985

• Sub-Targets also specified for lending to– Direct Finance to Agriculture and – Weaker Sections

• Details as per latest RBI Master Circular

• 2nd Nat’n of 6 Com’l Banks – April 1980

• Banking Sector Reforms – 1993 onwards



Targets under Priority Sector

Particulars Dom’ Banks Foreign Banks

Total PS Adv 40% of NBC 32% of NBC

Total Agri Adv 18% of NBC No Target

SSI Advances No Target 10% ofNBC

Export Credit Not included 12% of NBC

Adv to W S 10% of NBC No Target





Small Scale Industry?

• SSIs are those engaged in the manufacture, processing or preservation of goods, and whose investment in plant and machinery (Original cost) does not exceed Rs. 1 crore.

• SSIs include units engaged in mining or quarrying, servicing and repairing of machinery.

• Ancilliary units – also investment not to exceed Rs 1 crore to be treated as SSI



SSI ... ...• Investment of Rs. 1 crore enhanced to Rs. 5

crore in respect of certain specified items – hosiery and hand tools by GOI

• Tiny Enterprises – investment in P&M upto Rs. 25 lakhs, irrespective of location of unit

• SSSBEs – investment upto Rs. 10 lakhs in Fixed Assets, Land and Buildings



Classification of PS Advances1. Agriculture

1. Direct Finance to Farmers

1. Purchase of Agricultural Implements and machinery

2. Development of Irrigation Potential3. Reclamation and Land Development4. Construction of Farm buildings and structures5. Construction of Storage facilities6. Production and processing of hybrid seeds for

crops7. Payment of Irrigation charges8. Other types of direct finance – Short Term loans,

Medium Term loans (Plantations, Allied Activities, etc)



Classification of PS Advances...1

1.2 Indirect Finance to Agriculture

- Distribution of Fertilisers, pesticides, etc

- Electricity Boards

- PACS, FSS and LAMPS

- Deposits in Rural Infrastructure Dev Fund

- Subscription to bonds of REC / NABARD

- Others – Hire Purchase, Storage facilities...






2. Small Scale Industries• Small Scale and Ancillary Industries• Tiny Enterprises• Small Scale Service and Business

Enterprises• Industrial Estates• KVI Sector




3. Other Activities / Borrowers- Small Road and Water Transport Operators- Retail Trade Advances- Small Business- Professional and Self Employed Persons- State Sponsored Organisations for Scheduled Castes and Secheduled Tribes- Education / Housing / Indirect Finance- Consumption Loans / Loans to SHGs / NGOs / Micro Credit / Food and Agro-based Processing Sector / Software Industry and Venture Capital



Sec II – Certain Types ...

1. Investments in Special Bonds1. SFCs / SIDCs

2. REC/NABARD/SIDBI /NSIC/NHB/HUDCO

2. Lines of Credit

3. Bills Re-discounting

4. Deposits in RIDF

5. Leasing and Hire Purchase



Sec III – Targets for PS lending

• Main Targets – 40 % of Net Bank Credit– 18 % of NBC to Agricultural Sector– 10% of NBC to ‘weaker sections’

– 1% of previous year’s total advances under Differential Rate of Interest (DRI) Scheme

(@ 4% pa interest; concessional terms; working capital and term loans – below Rs. 10,000)



Weaker Sections1. SMF with <5 acres; landless labourers,

tenant farmers and share croppers2. Artisans, Village / Cottage Inds – Rs 50,0003. Swarna jayanti Gram Swarojgar Yojana4. SCs / STs; DRI Scheme;5. Swarna jayanti Shahari Rojgar Yojana6. Scheme for Liberation and Rehabilitation of

Scavengers (SLRS)7. Advances to Self Help Groups



Targets for Foreign Banks• Min lending to PS Advances – 32 per cent

• No branches in Rural Areas !

• PS include export credit provided by them

• Within the target – lending to SSIs should not be less than 10% of NBC

• Export Credit should not be less than 12%

• Any shortfalls in targets – amount should be deposited in bonds of SIDBI



Sec IV – Common Guidelines

• Processing of Application Forms– Completion of Forms– Issue of Acknowledgement of Forms– Disposal of Applications– Rejection of Proposals– Register of Rejected Applications

• Mode of Disbursement of Loans

• Repayment Schedule



Sec IV – Common Guidelines...1

• Rate of Interest

• Inspection Charges

• Insurance against Fire and Other Risks

• Other Charges

• Photographs of Borrowers

• Discretionary Powers

• Machinery to look into Complaints



Recent trends in Bank lending to Agriculture and SSIs









RBI Data on Priority Sector loans



Advances to Priority Sector by PSBs – Progress (Rs in Crores)

Sector/ Year

June 1969

Mar 03 Mar 04 Mar 05 Mar 06

1.AGL 162 70,502 84,435 109,917 1,54,900

Direct 40 51,484 62,170 83,038 1,11,636

Indirect 122 19,017 22,265 26,879 43,264

2. SSI 257 52,646 58,311 67,800 82,492

3.OTH 22 71,197 96,170 125,114 1,64,473

4.TOT 441 199,786 2,44,456 307,046 4,10,379

5.NBC 3,016 485,271 560,819 717,419 1017,614



Advances to PS by Pvt Sector Banks (Rs in Crores)

Sector March 2004

March 2005

March 2006

Priority Sector (% to NBC)

48,920 (47.3)

69,886 (43.6)

1,06,566 (42.8)

i. Agriculture 14,730 21,636 36,185

ii. SSI 7,590 8,592 10,447

iii. Other PS 25,786 38,797 58,243







Miscellaneous

• All PS loan applications upto Rs. 25,000 should be disposed off within a fortnight.

• Others within 8 to 9 weeks

• Loans upto Rs. 2 lakhs – Interest rate not to exceed Prime Lending Rate (PLR)

• Monitoring by RBI – Through periodic returns – Lead Bank Scheme – Review Meetings at Block, Dist and State levels



NABARD• NATIONAL BANK FOR

AGRICULTURE AND RURAL DEVELOPMENT

• ESTD IN 1982/MUMBAI• DEVELOPMENTAL AND

REFINANCING FUNCTIONS OF ARDC (RBI)

• Comml/Coop/RR Banks• www.nabard.org

http://www.nabard.org/



NABARD – 25 Years

• To provide focused and undivided attention to the development of rural India by facilitating credit flow for promotion of agriculture and rural non farm sector

• NABARD's functions can be classified into 4 major categories viz. Credit Planning, Financial Services, Promotion and Development, and Supervision



NABARD – 25 Years …

• Prepares Potential Linked Credit Plan (PLP) annually for each district by assessing potential available in agri and rural sector

• It has channelised Rs. 1,21,000 crore under investment credit programme and RIDF

• Number of innovations - Self Help Groups (SHGs), Farmers Clubs, Rural Infrastructure Development Fund (RIDF), Watershed Development, Kisan Credit Card (KCC), District Rural Industries Project, Cluster Development Programme and Rural Innovation Fund.



SIDBI• SMALL INDUSTRIES

DEVELOPMENT BANK OF INDIA

• SUBSIDIARY OF IDBI ……. IN 1990

• HQ IN LUCKNOW• OFFICES ALL OVER

INDIA• www.sidbi.in

http://www.sidbi.in/



SIDBI - Mission• To empower the Micro, Small and Medium

Enterprises (MSME) Sector with a view to contributing to the process of economic growth, employment generation and balanced regional development.

• SIDBI offers Direct Finance, Bill Finance, Refinance, International Finance, Micro Finance, Other Schemes, Promotional Activities and also accepts Fixed Deposits



SIDBI Customers/Products

• SIDBI offers category-wise products to:-

– Institutions – Banks, SFCs, etc

– Investors

– Existing and New Entrepreneurs

– Existing Customers

– Women Entrepreneurs

– Micro Finance Institutions



DICGC• www.dicgc.in• Insuring deposits with banks - first in 1948 after

banking crises in Bengal - reconsidered in 1949• In 1950, Rural Banking Enquiry Committee also

supported • Serious thought given by RBI & GOI after crash of

Palai Central Bank Ltd., & Laxmi Bank Ltd. in 1960• Deposit Insurance Corporation Bill was introduced

in 1961 - Came into force on January 1, 1962• Deposit Insurance Scheme was initially extended to

functioning commercial banks only (SBI and subsidiaries, other banks and branches of the foreign banks in India)

http://www.dicgc.in/



DICGC …• Extended to Cooperative Banks in 1968• GOI / RBI introduced CGC in 1960• CGO guaranteed advances granted by

banks and other Credit Institutions to SSIs• On merger of DIC & CGS, Deposit Insurance

and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978

• SSIs, Priority Sector Advances etc covered from 1981 ………



CGTSI Fund• Govt of India, Ministry of SSI, launched the Scheme

to strengthen credit delivery system • Credit Guarantee Fund Trust for Small Industries

was set up by GOI and SIDBI • The lender should give importance to project

viability and secure the loan purely on the primary security of the assets financed

• Renamed (BL 3/8/07) as Credit Guarantee Fund Trust for Micro and Small Enterprises – www.cgtmse.in – Based in Mumbai

http://www.cgtmse.in/



SMERA• www.smera.in• SME Rating Agency of India Limited (SMERA) is a

joint initiative by SIDBI (www.sidbi.in), Dun & Bradstreet Information Services India Private Limited (D&B) (www.dnb.co.in), Credit Information Bureau (India) Limited (CIBIL) (www.cibil.com) and several leading banks in the country in September 2005

• SMERA is the country's first rating agency that focuses primarily on the Indian SME segment.

• SMERA's primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs.

http://www.smera.in/

http://www.sidbi.in/

http://www.dnb.co.in/

http://www.cibil.com/



Kissan Credit Cards• http://www.sbi.co.in/viewsection.jsp?lang

=0&id=0,8,66

• Kisan Credit Cards (KCC)

• Kisan Gold Cards Scheme

http://www.sbi.co.in/viewsection.jsp?lang=0&id=0,8,66





Credit Cards for SSIs• SMALL BUSINESS CREDIT CARD

• ARTISAN CREDIT CARD

• SWAROJGAR CREDIT CARD

• From SBI – www.sbi.co.in

• Other banks too

http://www.sbi.co.in/



Pop-group wise o/s credit of Com. Banks in India (%age to Total) - RBI

Pop’Grp Mar’01 Mar’05 Mar’06 Mar’07

Rural 10.1 9.2 8.4 7.9

SUrban 11.5 11.3 10.0 9.7

Urban 16.8 16.4 16.4 16.2

Metro 61.6 63.1 65.3 66.1

All-India (Rs Bn)

5,564 11,578 15,175 19,496

Documents

Priority Sector Advances in Indian Banking