Meeting new priority lending targets an uphill task for banks
By Vaibhav Aggarwal
Jul 27, 2012
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Banks in the country might find it difficult to achieve priority lending targets under the new Reserve Bank of India guidelines. The banks have an annual target of 13.5% of total credit to direct agricultural lending and 4.5% to indirect agricultural lending.

Under the new classification, the bank loans to food and agri-product processing units might be considered as loans to Micro and Small Enterprises (MSEs), if these units meet the capital criterion.
A manufacturing unit will be considered a micro enterprise if the initial capital invested in the plan is below Rs. 25 lakh; for it to be a small enterprise, the initial capital mustn't exceed Rs. 5 crore.

According to the new classification, the banks loan to any such food and agro processing unit would not be considered "indirect priority lending" and this would bring down bank's priority loan books. The banks would recieve penalty if they are unable to get their indirect credit level to optimum.

One way to meet these targets is by investing in low return deposits with National Housing Bank (NHB)/ Small Industries Development Bank of India (SIDBI)/National Bank for Agricultural and Rural Development (NABARD).

Till now banks have been easily meeting the indirect priority lending to food and agro-processing units with initial capital of upto Rs. 10 crore. Food processing units include dairy, meat, fruit and vegetables, fishery, poultry, and also alcoholic drinks, aerated water and soft drinks. Agro processing units are edible oil mills, rice, sugar, pulses processing units.

Priority lending is a mandate for banks to maintain adequate credit flow at affordable cost to agricultural sector, micro and small enterprise (MSE), and other sections of the society with limited access to credit.

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