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Priority Sector Lending norms negative for foreign banks

The report is a recommendation given by a working group, so it is not yet the law. The priority sector used to take away 40 percent of the total loans given and there is a status quo over that.

The Reserve Bank of India today released its report on Priority Sector Lending guidelines. CNBC-TV18’s Latha Venkatesh gives a lowdown on its details.

The report is a recommendation given by a working group, so it is not yet the law. The priority sector used to take away 40 percent of the total loans given and there is a status quo over that.

It has been broken up into many minor segments like the amount for small farm loans and agriculture loans so many of those divisions remain. Some divisions, infact, have been added which is perhaps not very healthy because it reduces the bankers’ elbow room.

The big takeaway is that the working group does not recommend any change to the responsibilities of foreign banks. Foreign banks were hoping to wriggle out of the whole thing to some extent at least if exports were included. Until very recently they used to lend to a lot of exports and exports were priority sector.

Now, the working group has very kindly admitted that exports is a priority sector but it adds that two percent of the loans given to exporters can be considered priority sector. So, the remaining 38 percent has to be met from non-export areas which is not very easy for foreign banks that have less that 20 branches. However, they have a little more time, until 2020 to conform to the priority sector guidelines and banks with over 20 branches will have to do so by 2018. Agriculture target of 18 percent has been redefined in which farm credit gets eight percent and the remaining 10 percent maybe given to agricultural infrastructure which maybe a bit of a relief because in that case, one can even lend to minor irrigation works which a lot of big companies undertake. The other big contribution coming from the working group is the starting of what are called Priority Sector Lending certificates.

The best example of foreign banks who don’t have as many branches, can buy these priority sector lending certificates which are issued by those who have already met that target. That is one of the biggest innovative schemes which actually governor Rajan had recommended even before he became the governor.

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