Priority Sector Advances: An Overview

Priority Sector Advances: Jaiib Paper 1 (Module B) Unit- 10

Dear bankers,

As we all know that  is Priority Sector Advances for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Priority Sector Advances (Unit-10), FUNCTIONS OF BANKS (Module B), Principle & Practice of Banking JAIIB Paper-1.

♦Priority Sector Advances

  • Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections. This is essentially meant for an all round development of the economy as opposed to focusing only on the financial sector.

◊What are the Targets and Sub-targets for banks under priority sector

The targets and sub-targets for banks under priority sector are as follows:

Categories Domestic scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) and Foreign banks with 20 branches and above Foreign banks with less than 20 branches
Total Priority Sector 40 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. 40 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, to be achieved in a phased manner by 2020.
Agriculture # 18 per centof ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers.

Not applicable
Micro Enterprises 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Not applicable
Advances to Weaker Sections 10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher Not applicable
# Domestic banks have been directed to ensure that their overall direct lending to non-corporate farmers does not fall below the system-wide average of the last three years achievement.

♦Different categories under priority sector

Priority Sector includes the following categories:

  •  Agriculture
  • Micro, Small and Medium Enterprises
  • Export Credit
  • Education
  • Housing
  • Social Infrastructure
  • Renewable Energy
  • Others

Agriculture:

  • Direct finance to agriculture shall include short, medium and long term loans given for agriculture and allied activities directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers without limit and to others (such as corporate, partnership firms and institutions) up to Rs. 2crs., for taking up agriculture/allied activities.
  • Indirect finance to agriculture shall include loans given for agriculture and allied activities as specified in Section I, appended.
  • This distinction between direct and indirect agriculture is dispensed with. Instead, the lending to agriculture sector has been re-defined to include (i) Farm Credit (which will include short-term crop loans and medium/long-term credit to farmers) (ii) Agriculture Infrastructure and (iii) Ancillary Activities.

Indirect Finance to Agriculture

  • If the aggregate loan limit per borrower is more than Rs2cr. in respect of para 20.3.1 (ii) above, the entire loan will be treated as indirect finance to agriculture.
  • Loans up to Rs.5crs. to producer companies set up inclusively by only small and marginal farmer under part IXA of companies Act 1956 for agricultural and allied activities.

Other Indirect Agriculture Loans

  • Loans up to Rs 5crs. per borrower to dealers/ sellers of fertilizers, pesticides, seeds, cattle feed poultry feed, agricultural implements and other inputs.
  • Loans up to Rs 5crs to cooperative societies of farmers for disposing of the produce of members.

Micro and Small Enterprises

Manufacturing Sector:-

  • Enterprises: Investment in plant and Machinery
  • Micro Enterprises: Do not exceed Rs 25lakhs
  • Small Enterprises: More than Rs 25 lakhs but does not exceed 5 crs.

Service Sector:-

  • Enterprises: Investment in equipment
  • Micro Enterprises: Do not exceed Rs 10lakhs
  • Small Enterprises: More than Rs 10 lakhs but does not exceed 2 crs.

Education

Education loans include loans and advances granted to only individuals for educational purposes.

  •  Up to Rs. 10 lakh for studies in India
  • Rs. 20 lakh for studies abroad.

Housing

  • In terms of the above Master Direction for RRBs, loans to individuals up to ₹ 20 lakh for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit does not exceed ₹ 25 lakh are eligible to be classified under priority sector. In terms of the Compendium for SFBs, loans to individuals up to ₹ 28 lakh in metropolitan centres (with population of ten lakh and above) and ₹ 20 lakh in other centres, are eligible to be classified under priority sector, provided that the cost of dwelling unit does not exceed ₹ 35 lakh and ₹ 25 lakh, respectively.
  • In order to bring the RRBs and SFBs at a level playing field with other Scheduled Commercial Banks, it has now been decided to enhance the housing loan limits for eligibility under priority sector lending. Accordingly, in respect of RRBs and SFBs, housing loans to individuals up to ₹ 35 lakh in metropolitan centres (with population of ten lakh and above) and ₹ 25 lakh in other centres, provided the overall cost of the dwelling unit in the metropolitan centres and at other centres does not exceed ₹ 45 lakh and ₹ 30 lakh, respectively will be eligible for classification under Priority Sector Lending.
  • Furthermore, the existing family income limit of ₹ 2 lakh per annum, prescribed under Para 9.4 of the above Master Direction for RRBs/Para 5.4 of the Compendium for SFBs, eligible for loans to housing projects exclusively for the purpose of construction of houses for Economically Weaker Sections (EWS) and Low Income Groups (LIG), is revised to ₹ 3 lakh per annum for EWS and ₹ 6 lakh per annum for LIG, in alignment with the income criteria specified under the Pradhan Mantri Awas Yojana.

Social infrastructure

  • Bank loans up to a limit of ₹50 million per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and household level water improvements in Tier II to Tier VI centres.

Renewable Energy

  • Bank loans up to a limit of ₹150 million to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. For individual households, the loan limit will be ₹1 million per borrower.

Weaker Sections

Priority sector loans to the following borrowers will be considered under Weaker Sections category: –

  • Small and marginal farmers
  • Artisans, village and cottage industries where individual credit limits do not exceed ₹0.1 million
  • Beneficiaries under Government Sponsored Schemes such as National Rural Livelihood Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
  • Scheduled Castes and Scheduled Tribes
  • Beneficiaries of Differential Rate of Interest (DRI) scheme
  • Self Help Groups
  • Distressed farmers indebted to non-institutional lenders
  • Distressed persons other than farmers, with loan amount not exceeding ₹0.1 million per borrower to prepay their debt to non-institutional lenders
  • Individual women beneficiaries up to ₹0.1 million per borrower
  • Persons with disabilities
  • Overdraft limit to PMJDY account holder up to ₹10,000/- with age limit of 18-65 years.
  • Minority communities as may be notified by Government of India from time to time.

♦Non-achievement of Priority Sector targets

  • Small Finance Banks having any shortfall in lending to priority sector shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD/NHB/SIDBI/ MUDRA Ltd., as decided by the Reserve Bank from time to time. The achievement will be arrived at the end of financial year based on the average of priority sector target /sub-target achievement as at the end of each quarter.
  • While computing priority sector target achievement, shortfall / excess lending for each quarter will be monitored separately. A simple average of all quarters will be arrived at and considered for computation of overall shortfall / excess at the end of the year. The same method will be followed for calculating the achievement of priority sector sub-targets. (Illustrative example given in Annex)
  • The interest rates on banks’ contribution to RIDF or any other Funds, tenure of deposits, etc. shall be fixed by Reserve Bank of India from time to time.
  • The misclassifications reported by the Reserve Bank’s Department of Banking Supervision would be adjusted/ reduced from the achievement of that year, to which the amount of declassification/ misclassification pertains, for allocation to various funds in subsequent years.
  • Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes.

♦Common guidelines for priority sector loans

Small Finance Banks should comply with the following common guidelines for all categories of advances under the priority sector.

  • Rate of interest: The rates of interest on bank loans will be as per directives issued by our Department of Banking Regulation from time to time.
  •  Service charges: No loan related and adhoc service charges/inspection charges should be levied on priority sector loans up to ₹25,000. In the case of eligible priority sector loans to SHGs/ JLGs, this limit will be applicable per member and not to the group as a whole.
  •  Receipt, Sanction/Rejection/Disbursement Register: A register/ electronic record should be maintained by the bank, wherein the date of receipt, sanction/rejection/disbursement with reasons thereof, etc., should be recorded. The register/electronic record should be made available to all inspecting agencies.
  • Issue of Acknowledgement of Loan Applications: Banks should provide acknowledgement for loan applications received under priority sector loans. Bank Boards should prescribe a time limit within which the bank communicates its decision in writing to the applicants.

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