Banks unable to meet their priority sector lending targets under MSME now stand a better chance.

Removal of existing loan limits of up to ₹5 crore to micro and small units and up to ₹10 crore to medium enterprises, will help banks make good the shortfall in MSME loans that qualify as priority sector lending.

Currently, all domestic and foreign banks with at least 20 branches are required to lend a minimum of 40 per cent of their total loans (Adjusted Net Bank Credit (ANBC) or credit equivalent amount of off-balance sheet exposure (whichever is higher)) to the priority sector (agriculture, micro enterprises, education, social housing, etc).

They are also required to meet sub-targets, such as 18 per cent for agriculture (8 per cent for small and marginal farmers), 7.5 per cent for micro enterprises and 10 per cent for weaker sections.

As per the RBI’s report on ‘Trend and Progress of Banking in India, 2016-17’, while private banks on aggregate basis were able to meet their priority sector lending target under the MSME, public sector banks have fallen short of the 7.5 per cent target.

For public sector banks, the loan amount outstanding under priority sector advances to MSMEs stood at ₹3.15 lakh crore — 6.3 per cent of ANBC against the target of 7.5 per cent. The removal of loan limits under the MSME could help PSU banks meet their target better as higher-value loans to MSMEs could qualify as priority sector and earn them better returns.

Currently, banks having any shortfall in lending to priority sector have to contribute to the Rural Infrastructure Development Fund (RIDF) established with Nabard and other specified funds

While interest rates on such funds (3-5 per cent, according to few bankers) vary and are fixed by the RBI from time to time, they fetch lower interest than could be earned by deploying them for lending purposes.

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