Sa-Dhan Newsletter Volume 5 Issue 2

Operational Costs of Delivering Microfinance : Banker's Perspectives

Priority sector lending

Based on the Economic Survey 2003-2004

T

The limited access of SSI sector to funds needs to be

he target fixed for priority sector lending by domestic

addressed on a priority basis. Large corporates are able

and foreign banks is 40 per cent and 32 per cent of

to access bank loans at below PLR besides accessing

their net bank credit (NBC), respectively. Public sector

international markets. But, for the SSI sector, the cost of

banks, as a group, have met the target of priority sector

funds continues to remain high despite falling deposit rates.

lending. At the end of March, 2003, priority sector lending

Banking institutions need to upgrade their credit assess-

by PSBs amounted to 42.5 per cent of their NBC.

ment capabilities so that a clear distinction can be made

Outstanding priority sector advances by private sector banks

between bad and good credit. The RBI in its mid-year review

constituted 44.4 per cent of NBC at the end of March, 2003

of monetary and credit policy for 2003-04 had announced

as compared with 40.9 per cent a year ago. Outstanding

a number of measures aimed at improving credit delivery

advances by foreign banks to priority sectors amounted to

to the SSI sector. These measures included raising the loan

33.9 per cent of their NBC. While there was a significant

limit from Rs.15 lakh up to Rs. 25 lakhs without the

improvement in the share of priority sector lending by

requirement of collateral; rationalising interest rate on the

private sector banks from 40.9 per cent of NBC as at end-

deposits of foreign banks placed with the Small Industries

March 2002, to 44.4 per cent as at end-March, 2003 foreign

Development Bank of India (SIDBI) towards their priority

banks witnessed a marginal reduction in their priority sector

sector shortfall (reduction of interest from 6.75 per cent

advances as proportion to NBC. As regards PSBs, there

to the prevailing bank rate) and mandating SIDBI to take

was improvement in the share of priority sector lending

appropriate steps to ensure that priority sector funds are

from 42.5 per cent of NBC as at end-March 2003 to 44.5

utilised expeditiously and the benefit of reductions in

per cent as at end 2003.

interest rates is passed on to borrowers. In addition, all

While all the bank groups met the overall targets under

loans granted by banks to Non- Banking Financial Com-

priority sector lending, there were short falls in meeting

panies (NBFCs) for the purpose of on-lending to the SSI

the sub-targets set for agriculture and weaker sections of

sector would also be reckoned under priority sector lending.

the society. For PSBs, advances to agriculture constituted

In its annual policy statement for 2004-05, the RBI

15.9 per cent of NBC, falling short of the sub-target of

announced new measures to improve the credit delivery

18 per cent. Outstanding advances to weaker sections

mechanism, specially to improve credit flows to priority

constituted 7.2 per cent of NBC at the end of September,

sectors and infrastructure. These include a waiver of

2003 falling short of the sub-target by 2.8 percentage

margin/security requirment for agricultural loans, coverage

points. At the end of March 2003, outstanding advances

of loans for storage units under priority sector representing

to agriculture and weaker sections by private sector banks

indirect agricultural finance, treatment of securitisation of

constituted 10.8 per cent and 1.5 per cent of NBC,

agricultural loans under priority sector and fixing NPA

respectively.

norms for agricultural finance.

To improve credit delivery to the agriculture sector, the RBI

Rural infrastructure development fund (RIDF)

in its annual monetary policy statement for 2003-04

extended the limit of Rs.20 lakh on advances granted to

Agriculture and rural infrastructure sectors have been

dealers in drip irrigation/sprinkler irrigation system/ agri-

witnessing a deceleration in public investment since the

cultural machinery, located in rural and semi-urban areas

Eighth Five-Year Plan. This is mainly because of the severe

to all areas. The sub-targets for foreign banks operating

resource crunch faced by the States, which are primarily

in the country are 10 percent of NBC for the small scale

responsible for the development of agriculture and rural

industry (SSI) sector and 12 per cent of NBC for export

infrastructure. Compounding the problem was shortfall in

credit. Export credit does not form part of priority sector

the priority sector lending to agriculture by the SCBs. It

lending for domestic banks. Outstanding advances towards

is against this background that the Government of India

export credit by foreign banks constituted 18.7 per cent

announced a scheme for setting up of RIDF in 1995-96.

of their NBC at the end of March, 2003, exceeding the target

Under the scheme, domestic commercial banks contribute

by 6.7 percentage points. There was a shortfall in meeting

to the Fund to the extent of their shortfall in their lending

the target set for SSI lending by these banks by 1.3

to the priority sector.

percentage points.

The main objective of the Fund is to provide loans to State

Governments and State-owned corporations to enable them

The declining share of the SSI sector in the outstanding

to complete on going rural infrastructure projects. The Fund

priority sector advances of public and private sector banks

is being operated by the National Bank for Agriculture and

since 1999- 2000 is a cause for concern. The share of SSI

Rural Development (NABARD). The corpus of RIDF 1-IX

advances in the NBC declined from 16.1 per cent at the

amounted to Rs. 34,000 crore at end-March, 2004. The

end of March, 1999 to 11.1 per cent at the end of March,

allocation during 2003-04 was Rs. 5,500 crore under RlDF-

2003 in respect of PSBs. For the private sector banks, the

lX Cumulative sanctions and disbursements under RIDF

share declined from 18.8 per cent to 8.3 percent in the

tranches I to IX amounted to Rs. 34,678 crore and

same period. There is no sub-target for advances to SSI

Rs.21,067 crore, respectively at the end of March 2004.

sector by domestic banks.

As on March 31, 2004, RIDF loans amounting to Rs. 14,004

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