RBI revises priority sector lending norms to address regional disparities in credit flow

The Reserve Bank of India (RBI) has decided to usher in an incentive framework for districts with comparatively lower flow of credit and a dis-incentive framework for districts with comparatively higher flow of priority sector credit from FY2022 onwards, to address regional disparities in the flow of priority sector credit.

As per its revised priority sector lending (PSL) guidelines, the targets prescribed for “small and marginal farmers” (SMFs) and “weaker sections” will be increased in a phased manner.

Higher credit limit (₹5 crore per borrowing entity) has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price.

Loan limits for renewable energy have been doubled to ₹30 crore. For individual households, the renewable energy loan limit will be ₹10 lakh per borrower.

For improvement of health infrastructure, credit limit for health infrastructure (including those under ‘Ayushman Bharat’) has been doubled to ₹10 crore in Tier II to Tier VI centres.

Banks can give loans up to a limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.

Loans given by banks to segments such as agriculture; micro, small and medium enterprises (MSMEs); export credit; education; housing; social infrastructure; and renewable energy are considered as PSL.

The framework

From FY 2021-22 onwards, the RBI said a higher weight (125 per cent) would be assigned to the incremental priority sector credit in the 184 identified districts where the credit flow is comparatively lower (per capita PSL less than ₹6,000), and a lower weight (90 per cent) would be assigned for incremental priority sector credit in the 205 identified districts where the credit flow is comparatively higher (per capita PSL greater than ₹25,000).

What this means is that banks with operations in districts where the credit flow is comparatively lower will need to step up lending to the priority sector so that they can reap the benefit of lower risk weight.

Banks with operations in districts where the credit flow is comparatively higher will be encouraged to maintain the lending momentum, else they risk attracting higher risk weights. Lower risk weight means relatively less regulatory capital will need to be maintained make a loan.

Urban co-op banks

For domestic commercial banks (excluding regional rural banks and small finance banks) and foreign banks with 20 branches and above, the PSL target is 40 per of so-called Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE), whichever is higher.

For regional rural banks (RRBs) and small finance banks (SFBs), the PSL target is 75 per cent. The overall PSL target of only urban co-operative banks will go up in a phased manner from the existing target of 40 per cent to 75 per cent by March-end 2024.

As per the revised targets for lending to SMFs (within the overall PSL target), banks (excluding urban co-operative banks) will need to step up loans to this segment in a phased manner from 8 per cent in FY21 to 10 per cent by FY24.

The lending target for weaker sections for domestic commercial banks and small finance banks goes up in a phased manner from 10 per cent in FY21 to 12 per cent in FY24.

The central bank said the applicable target for lending by all domestic banks (other than UCBs) and foreign banks with more than 20 branches to the non-corporate farmers for FY 2020-21 will be 12.14 per cent of ANBC or CEOBE, whichever is higher. These banks should make all efforts to reach the level of 13.5 percent of ANBC (erstwhile target for direct lending to agriculture sector).

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