RBI widens PSL coverage, small farmers to get more credit

Mumbai: The Reserve Bank on Thursday revised priority sector lending norms to ensure a phased increase in loans to small farmers, and also made it clear that smaller foreign banks will have to meet the 40 per cent target over the next five years.

The RBI also said overdrafts of up to Rs 5,000 being extended by banks under the PM’s new financial inclusion drive will also be treated as priority sector lending (PSL), subject a cap on annual household income–which is Rs 1 lakh for rural and Rs 1.60 lakh for non-rural households.

Under the new guidelines, issued a day after the suicide of a farmer at a rally in Delhi, credit to small and marginal farmers will should be 8 per cent of a bank’s total credit by by March 2017.

Medium enterprises, social infrastructure and renewable energy are new sectors which will qualify under the mandatory priority sector norms which aim at uplifting the weaker sections of the economy by increasing formal credit to them, the RBI said in a circular this evening.

Banks are asked to lend 40 per cent of their credit to such sections, failing which money gets deposited into a low-yielding fund for rural development.

Free market advocates complain against the necessity of having such a requirement, saying it stifles banks’ growth.

For foreign banks, where the mandatory PSL has been a contentious issue, RBI on Thursday said banks with less than 20 branches will have to gradually achieve the 40 per cent target by March 2020.

Given the limitations of their networks, smaller foreign banks can book up to 32 per cent of their annual loans to the export sector, it added.

Those with over 20 branches, which already have PSL targets and sub-targets for agriculture and weaker sections to be achieved by March 2018 under a previously announced plan, adding sub-targets for small and marginal farmers and micro-enterprises will be made applicable post-2018, after a review in 2017.

Dispensing away with the distinction between direct and indirect agriculture lending, the new guidelines set a target of 8 per cent for small and marginal farmers to be achieved by March 2017.

The regulator has also set a target of 7.5 per cent for lending to micro-enterprises, while retaining the 10 per cent target for the weaker sections.