Faced with contraction in GDP (gross domestic product) growth by a whopping 23.9% and credit growth at a low of 6.7% during the first quarter of current financial year (FY), on September 4, 2020, the Reserve Bank of India (RBI) has brought about changes in the norms for priority sector lending (PSL).
The commercial banks, including foreign banks, are required to mandatorily earmark 40% of the adjusted net bank credit for PSL. Regional rural banks (RRBs) and small finance banks (SFBs) are required to allocate 75% of adjusted net bank credit (ANBC) to PSL. Within the over 40% limit for PSL, there are sub-limits; for instance, agriculture gets 18% of the ANBC.
Although, PSL guidelines do not lay down any preferential rate of interest for priority sector loans, generally such loans are considered cheaper and more accessible when compared to normal loans. The rate of interest on such loans is as per directives issued by the Department of Banking Regulation (DoBR) of the RBI from time to time. The rate varies from sector to sector,
The aim of changes in guidelines announced by RBI is to enable better credit penetration to credit deficient areas, increase in lending to small and marginal farmers and weaker sections and boosting credit to renewable energy and health infrastructure.
From FY 2021-22 onwards, a higher weight of 125% would be assigned to incremental priority sector credit in the identified districts where the per capita PSL is less than Rs 6,000/-, and a lower weight of 90% would be assigned for incremental priority sector credit in the identified districts where the per capita PSL is more than Rs 25,000/-. As many as 184 districts with low per capita PSL credit flow are expected to benefit from this move.
With a view to give a boost to renewable energy, bank loans up to a limit of Rs 30 crore to borrowers for purposes like solar-based and biomass-based power generators, windmills, micro-hydel plants, and non-conventional energy-based public utilities – such as street lighting systems and remote village electrification — will be eligible for priority sector classification (the existing limit was Rs 15 crore). For individual households, the loan limit will be Rs 10 lakh.
The RBI has also doubled the credit limit for improvement of health infrastructure. It has allowed bank loan of up to Rs 10 crore per borrower for building healthcare facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres; and up to Rs 5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including the construction and refurbishment of household toilets and water improvements at household level;
The RBI has also increased the targets for small and marginal farmers (farmers with landholding < one hectare are defined as marginal farmers whereas those with holding in the 1-2 hectare range are treated as small farmers) and weaker sections. For 2020-21, the applicable target for lending to the non-corporate farmers will be 12.14% of the ANBC or credit equivalent of off-balance sheet exposures (CEOBE) whichever is higher. The apex bank has also reiterated that banks should make efforts to reach the level of 13.5 per cent of ANBC – erstwhile target for direct lending to agriculture sector.
The banking regulator has also prescribed higher credit limit for farmers producers organizations (FPOs) and farmers producers companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. Loans for these activities will be subject to an aggregate limit of Rs 2 crore per borrowing entity.
Finally, it has brought financing of start-ups under PSL. Start-ups which conform to the definition laid down by the department for promotion of industry and internal trade (DPIIT) in Ministry of Commerce and Industry and are engaged in activities other than agriculture or micro, small and medium enterprises (MSMEs) can avail of loans up to Rs 50 crore under priority sector lending.
Prima facie, reserving a certain percentage of lendable funds for priority sectors and shuffling of these quotas from the time to time carries a lot of appeal. But, a basic question we need to ask is whether this is serving the intended purpose. What is the impact on ground zero? To get a sense, let us look at the loan for agriculture.
According to a study by an internal working group of the RBI, in several states, the quantum of crop loan was found to be higher than the value of all agricultural inputs (in Andhra Pradesh, during 2015-2017, this was 7.5 times the value of agri-inputs). Considering that crop loans are taken mostly for buying agricultural inputs and when the value of the former exceeds the latter, it clearly points towards diversion of funds to other (albeit non-farm) uses.
Even out of credit that flows to agriculture, a disproportionately higher share is cornered by large farmers viz. those with land size > 10 hectares. During 2016-17, large farmers who account for 0.6% of the total number, got away with 41% of total agri-credit. Semi-medium and medium farmers owning between 2-10 hectares (they are 13.2% of all farmers) get bulk of the balance 59% agri-credit. Small and marginal farmers (they are 86.2% of the total number) get very little; in fact, nearly 41% of them don’t even have access to banks.
Asset creation in agriculture holds the key to sustainable increase farmers’ income. Yet, the share of investment credit in total farm credit is only 25% (down from 50% in 2000). A big chunk of this also goes to medium and large farmers. According to the committee on “Status of Farmers’ Income: Strategies for Accelerated Growth” to identify ways to double farmers’ income, small and marginal farmers finance 30.8% and 52.1% of their investment in assets through informal sources such as moneylenders, traders and input dealers (albeit at high interest rate) etc. This is because they don’t have access to banks.
As per RBI directive, short-term crop loan up to Rs 300,000/- is available at subsidized interest rate of 7%; an additional incentive of 3% is provided for repayment within due date. Effectively, the interest cost works out to only 4%. Studies have found umpteen instances, whereby large, medium and semi-medium farmers having borrowed from banks at such low rate, on-lend to small/marginal farmers at much higher rate thereby making a huge profit.
There is large-scale mis-appropriation of bank credit even as small and marginal farmers who need the most and for whom these quotas (mandatory limits under PSL) are meant don’t get. They are forced to depend on informal sources who charge high interest rates. With meager income (courtesy, low yield and low price realization from sale of produce), they are unable to pay back which leads to pile up of debt. In many cases, farmers are forced to part with their land even leading to the extreme step of committing suicide.
Despite these pitfalls, our policy makers continue with the system and keep on adding more and more categories and increasing the limit under each. What is the sanctity of these limits say, Rs 30 crore to borrowers for solar-based power generator? Is it the case of RBI that a loan for Rs 30 crore plus one will not qualify for lending under priority sector? That sounds bizarre!
Putting in place such a system brings in lot of discretion and gives the concerned bank manager (or a group of officials i.e. in case the power of taking decision is vested in a committee) lot of room to maneuver. From the perspective of borrower, every aspirant – irrespective of his scale of operation – will play with numbers to keep his/her borrowing proposal within the threshold. That is where the discretionary authority of the manager will come in to full play.
In case of ‘start-ups’, an additional layer of discretion creeps in. This is because the entity applying for loan has to conform to the definition of start-up laid down by commerce ministry. The definition being susceptible to many interpretations, the bureaucrat’s discretion will also play a role even as the bank makes a reference to the ministry seeking latter’s view on the loan proposal.
While, the objective of PSL is far from achieved, it causes a collateral damage. Lending to priority sectors being at a concessional rate and only partial reimbursement of the subsidy (in many cases, no reimbursement at all), the bank is forced to charge higher rate on loans to other/non-priority sectors. This in turn, has the effect of undermining the competitiveness and viability of the latter.
The RBI should do away with the PSL system. The banks may continue with lending to weaker sections such as poor farmers at concessional rate but that should be need based and funds to be given after conducting due diligence. The loan sanctioning authority should be held accountable for their actions.