RBI/2014-15/22
UBD.CO.BPD.(PCB) MC.No.7/09.09.001/2014-15

July 1, 2014

The Chief Executive Officer
All Primary (Urban) Co-operative Banks

Dear Sir / Madam,

Master Circular - Priority Sector Lending - UCBs

Please refer to our Circular UBD.CO.BPD.(PCB) MC. No.18/09.09.001/2013-14 dated October 8, 2013 on the Revised Guidelines on Lending to Priority Sector for UCBs (available at RBI website www.rbi.org.in). The enclosed Master Circular consolidates and updates all the instructions / guidelines on the subject issued up to June 30, 2014 as listed in the Appendix.

Yours faithfully,

(A.K. Bera)
Principal Chief General Manager
Encl: As above

Master Circular Priority Sector Lending

1. Introduction on Priority Sector Lending

1.1 At a meeting of the National Credit Council held in July 1968, it was emphasised that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries. The description of the priority sectors was later formalised in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines were issued in this connection indicating the scope of the items to be included under the various categories of priority sector. Although initially there was no specific target fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 percent by March 1979.

1.2 At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sector to 40 percent by March 1985. Subsequently, on the basis of the Recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial banks were advised to achieve the target of priority sector lending at 40 percent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups.

1.3 The guidelines were last revised in the year 2007 based on the recommendations made in September 2005 by the Internal Working Group of the RBI (Chairman: Shri C. S. Murthy). The Sub-Committee of the Central Board of the Reserve Bank (Chairman : Shri Y. H. Malegam) constituted to study issues and concerns in the Micro Finance institutions (MFI) sector, inter alia, had recommended review of the guidelines on priority sector lending.

1.4 Accordingly, Reserve Bank of India in August 2011 set up a Committee to re-examine the existing classification and suggest revised guidelines with regard to Priority Sector lending classification and related issues (Chairman: M V Nair). The recommendations of the committee were placed in the public domain inviting public comments. The recommendations of the Committee were examined based on the interface with various stakeholders and in the light of the comments / suggestions received from Government of India, banks, financial institutions, Non-Banking Financial Companies, Associations of industries, public and Indian Banks' Association; and revised guidelines were issued on October 8, 2013 in supersession of guidelines mentioned in the Master Circular UBD BPD (PCB) MC No.7/09.09.001/ 2012-13 dated July 02, 2012.

2. Categories under priority sector

1. Agriculture

2. Micro and Small Enterprises

3. Education Loans

4. Housing Loans

5. Others

The eligible activities under the above categories are specified in paragraph 4

3. Targets /Sub-targets for Priority sector

3.1 The targets under priority sector lending would be linked to Adjusted Net Bank Credit (ANBC) (total loans and advance minus bills rediscounted with RBI and other approved Financial Institutions plus investments made after August 30, 2007 in non-SLR bonds under HTM category) or Credit Equivalent amount of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the previous year. For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks may use current exposure method. Inter-bank exposures including inter-bank off-balance sheet exposures will not be taken into account for the purpose of priority sector lending targets / sub-targets.

3.2 The targets and sub-targets set under priority sector lending for UCBs are furnished below. The stipulation regarding priority sector lending is not applicable to the Salary Earners' Banks.

Note:

1. Banks should not deduct / net any amount like provisions, accrued interest, etc, from ANBC.

2. With effect from the fortnight beginning August 24, 2013, incremental FCNR (B) deposits as also NRE deposits with reference to base date of July 26, 2013, and having maturity of three years and above, mobilized by banks, will be exempted from the maintenance of CRR / SLR. Advances granted in India against the incremental FCNR (B) / NRE deposits qualifying for exemption from CRR / SLR requirements, as detailed above, will also be excluded from Adjusted Net Bank Credit for computation of priority sector targets.

3. On a review, it has been decided that the exemption granted on incremental FCNR (B) /NRE deposits from maintenance of CRR/SLR will be withdrawn with effect from reporting fortnight beginning June 14, 2014, i.e., only the eligible amount of incremental FCNR (B) and NRE deposits of maturities of three years and above from the base date of July 26, 2013, and outstanding as on June 13, 2014, would qualify for CRR/SLR exemption till their maturities/ pre-mature withdrawals. Advances extended in India against the above mentioned incremental FCNR (B)/ NRE deposits, qualifying for exemption from CRR/ SLR requirements, will be eligible for exclusion from Adjusted Bank Credit, till their repayment, for computation of priority sector lending targets.

4. Description of the Categories under priority sector

4.1. Agriculture

4.1.1. Direct Agriculture

4.1.1.1 Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on such loans] engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage).

4.1.1.2 Loans to others [such as corporates, partnership firms and institutions] for Agriculture and Allied Activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) up to an aggregate limit of ` 2 crore per borrower for the following purposes:

1. Short-term loans for raising crops, i.e. for crop loans.
   
   This will include traditional/non-traditional plantations, horticulture and allied activities.

2. Medium & long-term loans for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm and development loans for allied activities).

3. Loans for pre-harvest and post-harvest activities viz.spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce.

4. Loans to farmers up to ` 50 lakh against pledge / hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not.

5. Loans to small and marginal farmers for purchase of land for agricultural purposes.

6. Loans to distressed farmers indebted to non-institutional lenders, against appropriate collateral.

7. Export credit for exporting their own farm produce.

4.1.2. Indirect agriculture

4.1.2.1. Loans to corporates, partnership firms and institutions engaged in Agriculture and Allied Activities [dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage)]

If the aggregate loan limit per borrower is more than ` 2 crore in respect of eligible advances under direct agriculture, the entire loan should be treated as indirect finance to agriculture

1. Short-term loans for raising crops, i.e. for crop loans.
   
   This will include traditional/non-traditional plantations, horticulture and allied activities.

2. Medium & long-term loans for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and development loans for allied activities).

3. Loans for pre-harvest and post-harvest activities such as spraying, weeding, harvesting, grading and sorting.

4. Loans up to ` 50 lakh against pledge / hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not.

5. Export credit to corporates, partnership firms and institutions for exporting their own farm produce.

6. Loans up to ` 5 crore to Producer Companies set up exclusively by only small and marginal farmers under Part IXA of Companies Act, 1956 for agricultural and allied activities.

4.1.2.2. Other indirect agriculture loans

1. Loans up to ` 5 crore per borrower to dealers / sellers of fertilizers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs.

2. Loans for setting up of Agriclinics and Agribusiness Centres.

3. Loans to Custom Service Units managed by individuals, institutions or organisations who maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and undertake farm work for farmers on contract basis.

4. Loans for construction and running of storage facilities (warehouse, market yards, godowns and silos), including cold storage units designed to store agriculture produce/products, irrespective of their location.
   
   If the storage unit is a micro or small enterprise, such loans will be classified under loans to Micro and Small Enterprises sector.

4.2. Micro and small enterprises

The limits for investment in plant and machinery/equipment for manufacturing / service enterprise, as notified by Ministry of Micro Small and Medium Enterprises, vide, S.O.1642(E) dated September 29, 2006 are as under:-

Bank loans to micro and small enterprises both manufacturing and service are eligible to be classified under priority sector as per the following:

4.2.1. Direct Finance

4.2.1.1. Manufacturing Enterprises

Loans to the Micro and Small enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and the activities notified by the Government from time to time are eligible for classification under priority sector. Loans to MSEs engaged in manufacturing or production of goods under MSMED Act 2006 are eligible for classification under priority sector as direct finance to MSEs.

4.2.1.2. Loans for food and agro processing

Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investment criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006.

4.2.1.3 Service Enterprises

Bank loans up to ` 5 crore per unit to Micro and Small Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.

4.2.1.4. Export credit to MSE units (both manufacturing and services) for exporting of goods/services produced by them.

4.2.1.5. Khadi and Village Industries Sector (KVI)

All loans sanctioned to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery. Such loans will be eligible for classification under the sub-target of 60 percent prescribed for micro enterprises within the micro and small enterprises segment under priority sector.

4.2.2. Indirect Finance

1. Loans to persons involved in assisting the decentralised sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

2. Loans to producers in the decentralised sector viz. artisans, village and cottage industries.

4.3. Education

Loans to individuals for educational purposes including vocational courses up to ` 10 lakh for studies in India and ` 20 lakh for studies abroad. Loans granted to institutions will not be eligible to be classified as priority sector advances.

4.4. Micro Credit

Provision of credit and other financial services and products of amounts not exceeding ` 50,000/- per borrower or the maximum permissible limit on unsecured advances whichever is lower.

4.5. Housing

1. Loans up to ` 25 lakh irrespective of location, to individuals for purchase / construction of a dwelling unit per family, excluding loans sanctioned by banks to their own employees.

2. Loans given for repairs to the damaged dwelling units of families up to ` 2 lakh in rural and semi- urban areas and up to ` 5 lakh in urban and metropolitan areas.

3. Assistance given to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of loan component of ` 5 lakh per dwelling unit.

4. Assistance given to a non-governmental agency approved by the NHB for the purpose of refinance for construction / reconstruction of dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of loan component of `10 lakh per dwelling unit.

5. Investments made by UCBs in bonds issued by NHB / HUDCO on or after April 1, 2007 shall not be eligible for classification under priority sector lending.

4.6. Others

4.6.1. Loans, not exceeding ` 50,000/- per borrower provided directly by banks to individuals;

4.6.2. Loans to distressed persons [other than farmers-already included under III (1.1) (vi)] not exceeding ` 50,000/- per borrower to prepay their debt to non-institutional lenders.

4.6.3. Loans to SHGs / JLGs for agricultural and allied activities would be considered as priority sector advance. Further, other loans to SHGs / JLGs up to `50,000 would be considered as Micro Credit and hence would be treated as priority sector advances.

4.6.4. Loans sanctioned to State Sponsored Organisations for Scheduled Castes / Scheduled Tribes for the specific purpose of purchase and supply of inputs to and / or the marketing of the outputs of the beneficiaries of these organisations.

5. Weaker Sections

Priority sector loans to the following borrowers will be considered under Weaker Sections category:-

1. Small and marginal farmers;

2. Artisans, village and cottage industries where individual credit limits do not exceed ` 50,000/-;

3. Scheduled Castes and Scheduled Tribes and women;

4. Education loans to persons having monthly income not exceeding ` 5000/-.

5. Loans to Self Help Groups;

6. Loans to distressed farmers indebted to non-institutional lenders;

7. Loans to distressed persons other than farmers not exceeding ` 50,000/- per borrower to prepay their debt to non-institutional lenders;

8. Persons from minority communities as may be notified by Government of India from time to time.

In States, where one of the minority communities notified is, in fact, in majority, item (h) will cover only other notified minorities. These States / Union Territories are Jammu & Kashmir, Punjab, Sikkim, Mizoram, Nagaland and Lakshadweep. UCBs should initiate steps to enhance / augment flow of credit under priority sector to artisans and craftsmen as also to vegetable vendors, cart pullers, cobblers, etc. belonging to minority communities. The minority communities notified in this regard are Sikhs, Muslims, Christians, Zoroastrians and Buddhists. Within the overall target for priority sector lending and the sub-target of 25 per cent for the weaker sections, sufficient care may be taken to ensure that the minority communities also receive an equitable portion of the credit.

6. Priority Sector-Data Reporting System

1. A robust reporting system with granularity and system generation of priority sector data is of utmost importance for proper monitoring and appropriate policy making.

2. In order to ensure that due emphasis is given to lending under priority sector, it is considered desirable that the performance is reviewed periodically. For this purpose, apart from the usual reviews, which the banks are periodically undertaking, specific reviews by the Board of Directors of the respective banks may be made on half-yearly basis. Accordingly, a memorandum may be submitted to the Board of Directors at half-yearly intervals i.e. as on September 30 and March 31 of each year giving a detailed critical account of the performance of the bank during the period showing increase / decrease over the previous half-year (Statement I).

3. Further, annual review of the performance under priority sector advances as on March 31 may also be placed before the Board (Statement II-part A) by 15th of the following financial year. A copy of the annual review (Statement II, part A to E) complete in all respect as on March 31 may be forwarded to the concerned Regional Office of the Reserve Bank with the Board's observations, indicating the steps taken / proposed to be taken for improving the bank's performance. The report should reach the Regional Office within a period of 15 days from the end of the period to which it relates.

4. The banks should submit Statement III (part A and B) as on March 31 within 15 days thereafter showing the position of direct loan and advances to agriculture and allied activities to the concerned Regional Office of this department under whose jurisdiction they function.

5. In order to facilitate compilation of the relative figures, banks may maintain a register to indicate all the items of priority sector advances and also another register for weaker section advances showing particulars, with separate folios to each activity so that the total of advances to priority sector and weaker sections under each activity and to each type of beneficiary may be available at any given point of time. The proforma of these registers may be on the lines of the annual return to be submitted to RBI.

7. Common guidelines for priority sector loans

Banks should comply with the following common guidelines for all categories of advances under the priority sector.

7.1. Service charges

No loan related and ad-hoc service charges/inspection charges should be levied on priority sector loans up to ` 25,000/-.

7.2. Receipt, Sanction/Rejection/Disbursement Register

A register/ electronic record should be maintained by the bank, wherein the date of receipt, sanction/rejection/disbursement with reasons thereof, etc., should be recorded. The register/electronic record should be made available to all inspecting agencies.

7.3. Issue of Acknowledgement of Loan Applications

Banks should provide acknowledgement for loan applications received under priority sector loans. Bank Boards should prescribe a time limit within which the bank communicates its decision in writing to the applicants.

8. Definitions

Small and Marginal Farmers: Farmers with landholding of up to 1 hectare are considered as Marginal Farmers. Farmers with a landholding of more than 1 hectare but less than 2 hectares are considered as Small Farmers. For the purpose of priority sector loans ‘small and marginal farmers’ include landless agricultural labourers, tenant farmers, oral lessees and share-croppers, whose share of landholding is within above limits prescribed for “Small and Marginal Farmer”.

State-Wise List of Minority Concentrated Districts

(vide para no. 5 (h))

Appendix

A - List of circulars consolidated in the Master Circular

B - List of other circulars from which instructions relating to Priority Sector Lending have also been consolidated in the Master Circular