RBI panel suggests easy passage for banks in meeting priority targets

KOLKATA: The priority sector lending targets may turn less rigorous for banks with a Reserve Bank of India panel suggesting two-to-three years' spell to comply with the proposed set of rules that envisage making bank credit accessible to the hitherto unbanked segments in step with the nation's financial inclusion goal.

The RBI working group, formed to examine the existing set of rules, has suggested a uniform 40% target for all banks irrespective of their network strength even as it proposed sub-targets to cover small and marginal farmers and micro enterprises. The panel is in favour of providing two-to-three years’ time for banks' convenience.

Foreign banks with minimum 20 branches may be given time till March 2018 to comply with the 40% norm, while others with less than 20 branches may get time till March 2020. Local banks may also be allowed flexibility in achieving the targets. The sector regulator published the report on Monday.
"The working group has focused on channeling credit into segments that get crowded out in the absence of specific targets," the panel headed by RBI chief general manager Lily Vadera said. The panel retained the agriculture lending target at 18% of adjusted net bank credit, while it proposed an 8% sub-target for small and marginal farmers. Banks — be it local or foreign — will enjoy more flexibility in lending to other farmers, agricultural infrastructure and ancillary activities to meet the balance 10%, to give a fillip to agri-infrastructure and agroprocessing.

The panel proposed that banks should achieve the 8% target by March 2017. “Priority sector targets are there for ages and the regulator keeps shifting the goal post at regular intervals. But the fact remains that bank credit does not reach the right people at the right time at the right price," said PwC India's associate director Robin Roy.

"Unlike retail and corporate sectors, the risk factors have not been looked into in case of agrilending, making the task for financiers, including banks, much more challenging," Roy said. In lending to small businesses, a 7.5% sub-target for micro enterprises has been recommended to ensure that they are not crowded out, in addition to lending to micro and small enterprises.

Banks may achieve the 7.5% sub-target in stages: 7% by March 2016 and 7.5% by March 2017. The panel suggested banks could include loans for sanitation, health care and drinking water facilities and renewable energy in priority sector. In case of shortfalls, the prevailing penal provisions would continue. The need for more stringent measures such as imposition of monetary penalties could be considered either independently or in combination with existing provisions after three years of operationalisation of the new rules, the panel said.