Priority Sector Advances in Indian Banking

Commercial Banking PGP 2007-09 Term III, March-April 2008

Chapter # 6
• Priority Sector broadly comprises
– Agriculture – Small Scale Industries – Others – Small Businesses, Retail Trade, Small Transport Operators, Professional and Self Employed Persons, Housing Loans, Educational Loans, Micro Credit, etc.
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Background
• • • • National Credit Council – July 1968 Lead Bank Scheme – 1969 (all 580 districts) Nationalisation of 14 Commercial Banks Description of PS formalised in 1972 (Informal Study Group on Statistics) • Initially, no specific targets fixed • November 1974 – RBI Guidelines to Banks to raise the share of finance to PS in aggregate advances to 33 1/3% by Mar 1979
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Developments
• March 1980 – Priority Sector Advances target raised to 40% by March 1985 • Sub-Targets also specified for lending to
– Direct Finance to Agriculture and – Weaker Sections

• Details as per latest RBI Master Circular • 2nd Nat’n of 6 Com’l Banks – April 1980 • Banking Sector Reforms – 1993 onwards
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Targets under Priority Sector
Particulars Total PS Adv Dom’ Banks 40% of NBC Foreign Banks 32% of NBC No Target 10% ofNBC 12% of NBC No Target
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Total Agri Adv 18% of NBC SSI Advances Export Credit Adv to W S
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No Target Not included 10% of NBC
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Small Scale Industry?
• SSIs are those engaged in the manufacture, processing or preservation of goods, and whose investment in plant and machinery (Original cost) does not exceed Rs. 1 crore. • SSIs include units engaged in mining or quarrying, servicing and repairing of machinery. • Ancilliary units – also investment not to exceed Rs 1 crore to be treated as SSI
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SSI ... ...
• Investment of Rs. 1 crore enhanced to Rs. 5 crore in respect of certain specified items – hosiery and hand tools by GOI • Tiny Enterprises – investment in P&M upto Rs. 25 lakhs, irrespective of location of unit • SSSBEs – investment upto Rs. 10 lakhs in Fixed Assets, Land and Buildings
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Classification of PS Advances
1. Agriculture
1. Direct Finance to Farmers

• • • • • • • •

Purchase of Agricultural Implements and machinery Development of Irrigation Potential Reclamation and Land Development Construction of Farm buildings and structures Construction of Storage facilities Production and processing of hybrid seeds for crops Payment of Irrigation charges Other types of direct finance – Short Term loans, Medium Term loans (Plantations, Allied Activities, etc)
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Priority Sector Advances

Classification of PS Advances...1
1.2 Indirect Finance to Agriculture - Distribution of Fertilisers, pesticides, etc - Electricity Boards - PACS, FSS and LAMPS - Deposits in Rural Infrastructure Dev Fund - Subscription to bonds of REC / NABARD - Others – Hire Purchase, Storage facilities...
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Classification of PS Advances...2
2. Small Scale Industries
• • • • • Small Scale and Ancillary Industries Tiny Enterprises Small Scale Service and Business Enterprises Industrial Estates KVI Sector

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Classification of PS Advances...3
3. Other Activities / Borrowers - Small Road and Water Transport Operators - Retail Trade Advances - Small Business - Professional and Self Employed Persons - State Sponsored Organisations for Scheduled Castes and Secheduled Tribes - Education / Housing / Indirect Finance - Consumption Loans / Loans to SHGs / NGOs / Micro Credit / Food and Agro-based Processing Sector / Software Industry and Venture Capital
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Sec II – Certain Types ...
1. Investments in Special Bonds
• • SFCs / SIDCs REC/NABARD/SIDBI /NSIC/NHB/HUDCO

• • • •

Lines of Credit Bills Re-discounting Deposits in RIDF Leasing and Hire Purchase
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Priority Sector Advances

Sec III – Targets for PS lending
• Main Targets – 40 % of Net Bank Credit
– 18 % of NBC to Agricultural Sector – 10% of NBC to ‘weaker sections’ – 1% of previous year’s total advances under Differential Rate of Interest (DRI) Scheme (@ 4% pa interest; concessional terms; working capital and term loans – below Rs. 10,000)
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Weaker Sections
1. SMF with <5 acres; landless labourers, tenant farmers and share croppers 2. Artisans, Village / Cottage Inds – Rs 50,000 3. Swarna jayanti Gram Swarojgar Yojana 4. SCs / STs; DRI Scheme; 5. Swarna jayanti Shahari Rojgar Yojana 6. Scheme for Liberation and Rehabilitation of Scavengers (SLRS) 7. Advances to Self Help Groups
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Targets for Foreign Banks
• • • • Min lending to PS Advances – 32 per cent No branches in Rural Areas ! PS include export credit provided by them Within the target – lending to SSIs should not be less than 10% of NBC • Export Credit should not be less than 12% • Any shortfalls in targets – amount should be deposited in bonds of SIDBI
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Sec IV – Common Guidelines
• Processing of Application Forms
– Completion of Forms – Issue of Acknowledgement of Forms – Disposal of Applications – Rejection of Proposals – Register of Rejected Applications

• Mode of Disbursement of Loans • Repayment Schedule
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Sec IV – Common Guidelines...1
• • • • • • • Rate of Interest Inspection Charges Insurance against Fire and Other Risks Other Charges Photographs of Borrowers Discretionary Powers Machinery to look into Complaints
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Priority Sector Advances

Recent trends in Bank lending to Agriculture and SSIs

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RBI Data on Priority Sector loans

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Advances to Priority Sector by PSBs – Progress (Rs in Crores)
Sector / Year 1.AGL
Direct Indirect

June Mar 03 Mar 04 Mar 05 Mar 06 1969 162 70,502 84,435 109,917 1,54,900
40 122 51,484 19,017 62,170 22,265 83,038 26,879 1,11,636 43,264

2. SSI 3.OTH 4.TOT 5.NBC

257 22

52,646 71,197

58,311

67,800

82,492

96,170 125,114 1,64,473

441 199,786 2,44,456 307,046 4,10,379 3,016 485,271 560,819 717,419 1017,614
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Priority Sector Advances

Advances to PS by Pvt Sector Banks
(Rs in Crores)
Sector Priority Sector (% to NBC) i. Agriculture ii. SSI iii. Other PS
Priority Sector Advances

March 2004 48,920 (47.3) 14,730 7,590 25,786

March 2005 69,886 (43.6) 21,636 8,592 38,797

March 2006 1,06,566 (42.8) 36,185 10,447 58,243
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Miscellaneous
• All PS loan applications upto Rs. 25,000 should be disposed off within a fortnight. • Others within 8 to 9 weeks • Loans upto Rs. 2 lakhs – Interest rate not to exceed Prime Lending Rate (PLR) • Monitoring by RBI – Through periodic returns – Lead Bank Scheme – Review Meetings at Block, Dist and State levels
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NABARD
• NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT • ESTD IN 1982/MUMBAI • DEVELOPMENTAL AND REFINANCING FUNCTIONS OF ARDC (RBI) • Comml/Coop/RR Banks • www.nabard.org
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NABARD – 25 Years
• To provide focused and undivided attention to the development of rural India by facilitating credit flow for promotion of agriculture and rural non farm sector • NABARD's functions can be classified into 4 major categories viz. Credit Planning, Financial Services, Promotion and Development, and Supervision
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NABARD – 25 Years …
• Prepares Potential Linked Credit Plan (PLP) annually for each district by assessing potential available in agri and rural sector • It has channelised Rs. 1,21,000 crore under investment credit programme and RIDF • Number of innovations - Self Help Groups (SHGs), Farmers Clubs, Rural Infrastructure Development Fund (RIDF), Watershed Development, Kisan Credit Card (KCC), District Rural Industries Project, Cluster Development Programme and Rural Innovation Fund.
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SIDBI
• SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA • SUBSIDIARY OF IDBI ……. IN 1990 • HQ IN LUCKNOW • OFFICES ALL OVER INDIA • www.sidbi.in
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SIDBI - Mission
• To empower the Micro, Small and Medium Enterprises (MSME) Sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. • SIDBI offers Direct Finance, Bill Finance, Refinance, International Finance, Micro Finance, Other Schemes, Promotional Activities and also accepts Fixed Deposits
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SIDBI Customers/Products
• SIDBI offers category-wise products to:– Institutions – Banks, SFCs, etc – Investors – Existing and New Entrepreneurs – Existing Customers – Women Entrepreneurs – Micro Finance Institutions
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• www.dicgc.in • Insuring deposits with banks - first in 1948 after banking crises in Bengal - reconsidered in 1949 • In 1950, Rural Banking Enquiry Committee also supported • Serious thought given by RBI & GOI after crash of Palai Central Bank Ltd., & Laxmi Bank Ltd. in 1960 • Deposit Insurance Corporation Bill was introduced in 1961 - Came into force on January 1, 1962 • Deposit Insurance Scheme was initially extended to functioning commercial banks only (SBI and subsidiaries, other banks and branches of the foreign banks in India)
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DICGC

DICGC …
• Extended to Cooperative Banks in 1968 • GOI / RBI introduced CGC in 1960 • CGO guaranteed advances granted by banks and other Credit Institutions to SSIs • On merger of DIC & CGS, Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978 • SSIs, Priority Sector Advances etc covered from 1981 ………
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CGTSI Fund
• Govt of India, Ministry of SSI, launched the Scheme to strengthen credit delivery system • Credit Guarantee Fund Trust for Small Industries was set up by GOI and SIDBI • The lender should give importance to project viability and secure the loan purely on the primary security of the assets financed • Renamed (BL 3/8/07) as Credit Guarantee Fund Trust for Micro and Small Enterprises – www.cgtmse.in – Based in Mumbai
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SMERA
• www.smera.in • SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI (www.sidbi.in), Dun & Bradstreet Information Services India Private Limited (D&B) (www.dnb.co.in), Credit Information Bureau (India) Limited (CIBIL) (www.cibil.com) and several leading banks in the country in September 2005 • SMERA is the country's first rating agency that focuses primarily on the Indian SME segment. • SMERA's primary objective is to provide ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to SMEs.
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Kissan Credit Cards
• http://www.sbi.co.in/viewsection.jsp?lang =0&id=0,8,66 • Kisan Credit Cards (KCC) • Kisan Gold Cards Scheme

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Credit Cards for SSIs
• • • • • SMALL BUSINESS CREDIT CARD ARTISAN CREDIT CARD SWAROJGAR CREDIT CARD From SBI – www.sbi.co.in Other banks too

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Pop-group wise o/s credit of Com. Banks in India (%age to Total) - RBI
Pop’Grp Rural SUrban Urban Metro All-India (Rs Bn) Mar’01 10.1 11.5 16.8 61.6 5,564 Mar’05 9.2 11.3 16.4 63.1 11,578
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Mar’06 8.4 10.0 16.4 65.3 15,175

Mar’07 7.9 9.7 16.2 66.1 19,496
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