Time to step up credit to small farmers, micro enterprises: FM to PSBs

  • July 8, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Time to step up credit to small farmers, micro enterprises: FM to PSBs

Subject :Economy

Section: Monetary Policy

Context: Underlining that public sector bank balance-sheets are in good shape, Finance Minister Nirmala Sitharaman on Thursday advised PSB chief executives to step up credit to small and marginal farmers and micro enterprises besides taking measures to meet the credit targets set for street-vendors under PMSVANidhi scheme.

Priority Sector Lending

Priority Sector Lending means lending credit by the banks to those sectors which are considered  important for the development of the basic needs of the country by the Government and the RBI. The banks are mandated to encourage the growth of such sectors with adequate and timely credit.

Background:

  • At a meeting of the National Credit Council held in July 1968, it was emphasized that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries.
  • The description of the priority sectors was later formalized in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank in May 1971.
  • Although initially there was no specific target fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33.3% by March 1979.Later revised to 40% by March 1985.
  • Subsequently, on the basis of the recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial banks were advised to achieve the target of priority sector lending at 40 percent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups.

What are the Different Categories of the Priority Sector?

  • Agriculture-It essentially consists of Farm Credit which will include short-term crop loans and medium/long-term credit to farmers, agriculture Infrastructure and ancillary activities, loans to distressed farmers, loans under Kisan Credit Card Scheme, Loans to corporate farmers, farmers’ producer organizations/companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in agriculture and allied activities, etc..
  • Micro, Small and Medium Enterprises-This includes loans to Khadi and Village industries, outstanding deposits with Small Industries Development Bank of India (SIDBI) and Micro Units Development Refinance Agency Bank etc
  • Export Credit-loans for export subject to a sanctioned limit of up to ₹ 25 crore per borrower to units having turnover of up to ₹ 100 crore
  • Education-Loans to individuals for educational purposes, including vocational courses, not exceeding Rs 20 lakh will be considered as eligible for priority sector classification. Loans currently classified as priority sector will continue till maturity.
  • Housing-Loans to individuals up to Rs 35 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs 25 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs 45 lakh and Rs 30 lakh respectively etc
  • Social Infrastructure-Bank credit to Micro Finance Institutions (MFIs) extended for on-lending to individuals and also to members of Self Help Group (SHGs)/Joint Liability Groups (JLGs) for water and sanitation facilities etc.
  • Renewable Energy-loans up to a limit of ₹ 15 crore 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 ₹ 10 lakh per borrower.
  • Advances to weaker sections
  • Others
    • Loans not exceeding Rs 1.00 lakh per borrower provided directly by banks to individuals and individual members of SHG/JLG, provided the individual borrower’s household annual income in rural areas does not exceed ₹1.00 lakh and for non-rural areas it does not exceed Rs 1.60 lakh, and loans not exceeding Rs 2.00 lakh provided directly by banks to SHG/JLG for activities other than agriculture or MSME, viz., loans for meeting social needs, construction or repair of house, construction of toilets or any viable common activity started by the SHGs.
    • Loans to distressed persons not exceeding Rs 1,00,000/- per borrower to prepay their debt to non-institutional lenders.
    • Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs and/or the marketing of the outputs of the beneficiaries of these organisations.

Priority sector loans to the following borrowers are treated under the Weaker Sections category

  • Small and Marginal Farmers.
  • Artisans, village and cottage industries where individual credit limits do not exceed Rs 1 lakh.
  • Beneficiaries under Government Sponsored Schemes such as National Rural Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
  • Scheduled Castes and Scheduled Tribes.
  • Beneficiaries of the Differential Rate of Interest (DRI) scheme.
  • Self Help Groups.
  • Distressed farmers are indebted to non-institutional lenders.
  • Distressed persons other than farmers, with loan amounts not exceeding Rs 1 lakh per borrower to prepay their debt to non-institutional lenders.
  • Individual women beneficiaries up to Rs 1 lakh per borrower.
  • Persons with disabilities.
  • Minority communities may be notified by the Government of India from time to time
  • Overdraft availed by PMJDY account holders as per limits and conditions prescribed by the Department of Financial Services, Ministry of Finance from time to time may be classified under Weaker Sections.
  • In States, where one of the minority communities notified is found to be in majority, the above covers only the other notified minorities.
  • These States,  Union Territories are Punjab, Meghalaya, Mizoram, Nagaland, Lakshadweep and Jammu & Kashmir.

The targets set under priority sector lending:

Domestic scheduled commercial banks and foreign banks with 20 branches and aboveForeign banks with less than 20 branchesRegional Rural BanksSmall Finance Banks
Top Priority Sector40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher; out of which up to 32% can be in the form of lending to Exports and not less than 8% can be to any other priority sector75 per cent of ANBC as computed or CEOBE whichever is higher. (Medium Enterprises, Social Infrastructure and Renewable Energy shall be reckoned for priority sector achievement only up to 15 per cent of ANBC).75 per cent of ANBC as computed or CEOBE whichever is higher.
Agriculture18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.Out of this 8%prescribed for Small and Marginal FarmersNot applicable18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
Micro Enterprises                                                            7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higherNot applicable7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher
Advances to Weaker Sections12 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higherNot applicable15 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher12 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher

Non-compliance

Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes.

To the extent of shortfall in the achievement of target, banks may be required to invest

  • Rural Infrastructure Development Fund (RIDF) established with National Bank for Agriculture and Rural Development (NABARD)
  • Other Funds with NABARD or National Housing Bank (NHB) or Small Industries Development Bank of India (SIDBI) or Micro Units Development Refinance Agency Bank (MUDRA Ltd)., as decided by the Reserve Bank from time to time,

Purchase priority sector lending certificates (PSLC)-Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of a shortfall. This also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector

PMSVANidhi scheme.

  • It is a special micro-credit facility scheme for providing affordable loan to street vendors.
  • The scheme is aimed at enabling the street vendors to resume their livelihoods that have been adversely affected due to COVID-19 lockdown.
  • Under the scheme, each of these streets vendors will be given a credit loan of Rs 10,000, which they can return as monthly installments within a year.
  • Those who repay their loans on time will get 7 percent annual interest as subsidy which will be transferred in their bank accounts. There is no provision for penalty
  • The scheme targets to benefit over 50 lakh street vendors, who had been vending on or before 24th March this year, in urban areas. The duration of the scheme is till March 2022. The street vendors belonging to the surrounding peri-urban or rural areas are being included as beneficiaries under the urban livelihoods programme for the first time.
  • The lending institutions under the Scheme include Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks, Cooperative Banks, NBFCs, Micro Finance institutions and Self Help Group banks.
economy Time to step up credit to small farmers