RBI/2012-13/57
UBD.BPD.(PCB).MC.No.7/09.09.001/2012-13

July 2, 2012

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

Madam / Dear Sir,

Master Circular- Priority Sector Lending - UCBs

Please refer to our Master Circular UBD.BPD (PCB) MC. No.7/09.09.001/2011-12 dated July 1, 2011 on the captioned subject (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, 2012 and listed in the Appendix.

Yours faithfully

(A. Udgata)
Chief General Manager – in – Charge

Encl: as above

Master Circular- Priority Sector Lending - UCBs

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 per cent by March 1979.

1.2 The need for Primary (urban) Co-operative Banks (UCBs) for providing credit to priority sectors had been examined by the Standing Advisory Committee for UCBs constituted by Reserve Bank in May 1983. The recommendations of the committee were accepted by Reserve Bank and accordingly the targets for lending to priority sector and weaker sections by the UCBs were stipulated.

1.3 On the basis of the recommendations made in September 2005 by the Internal Working Group (Chairman : Shri C. S. Murthy), set up in Reserve Bank to examine, review and recommend changes, if any, in the existing policy on priority sector lending including the segments constituting the priority sector, targets and sub-targets, etc. and the comments / suggestions received thereon from banks, financial institutions, public and the Indian Banks' Association (IBA), it has been decided to include only those sectors as part of the priority sector, that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises. Accordingly, the broad categories of priority sector for UCBs will be as under:

2. Categories of Priority Sector

2.1 Agriculture (Direct and Indirect Finance): Direct finance to agriculture shall include short, medium and long term loans given for agriculture and allied activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) directly to individual farmers without limit for taking up agriculture / allied activities. Direct finance may be limited to regular members and not to nominal members or to agencies like primary agriculture credit societies (PACS), primary land development banks etc. Indirect finance to agriculture shall include loans given for agriculture and allied activities as specified in para 5 appended.

Loans granted to agriculture and allied activities irrespective of whether the finance is for export activities or domestic activities, are eligible to be classified as priority sector. The export credit granted for agriculture and allied activities may be reported separately under heading "Export Credit to Agriculture Sector" in statement II.

2.2 Small Enterprises (Direct and Indirect Finance) : Direct finance to small enterprises shall include all loans given to micro and small (manufacturing) enterprises engaged in manufacture / production, processing or preservation of goods, and micro and small (service) enterprises engaged in providing or rendering of services, and whose investment in plant and machinery and equipment (original cost excluding land and building and such items as mentioned therein) respectively, does not exceed the amounts specified in Section I, appended. The micro and small (service) enterprises shall include small road and water transport operators, small business, professional & self-employed persons, and all other service enterprises, as per the definition given in para 5. Indirect finance to small enterprises shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector.

Loans granted to micro and small enterprises (MSE) (manufacturing and services) are eligible for classification under priority sector provided such enterprises satisfy the definition of MSE sector as contained in MSMED Act 2006, irrespective of whether the finance is for export activities or domestic activities. The export credit granted to MSEs may be reported separately as "Export Credit to Micro and Small Enterprises Sector" in statement II.

2.3 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

2.4 Education Loans : Education loans include loans and advances granted to only individuals for educational purposes up to `10 lakh for studies in India and `20 lakh for studies abroad, and do not include those granted to institutions;

2.5 Housing Loans: Loans up to `25 lakh to individuals for purchase / construction of dwelling unit per family*, (excluding loans granted by banks to their own employees) and loans given for repairs to the damaged dwelling units of families up to `1 lakh in rural and semi-urban areas and up to `2 lakh in urban and metropolitan areas.

*  Family for this purpose means and includes the spouse of the member and the children, parents, brothers and sisters of the member who are dependent on such member, but shall not include legally separated spouse.

2.6 Loans to Self Help Groups (SHG) / Joint Liability Groups (JLGs): 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 treated as priority sector advances. Lending to SHGs, which qualify as loans to priority sector, would also be treated as part of lending to weaker sections.

3. Targets / Sub-targets

3.1 The targets under priority sector lending would be linked to Adjusted Bank Credit (ABC) (total loans and advance plus investments made by UCBs in non-SLR bonds) or Credit Equivalent amount of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the previous year. Existing investments, as on August 30, 2007, made by banks in non-SLR bonds held in HTM category will not be taken into account for calculation of ABC. However, fresh investments by banks in non-SLR bonds will be taken into account for the purpose. For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks may use current exposure method. Inter-bank 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:

3.3 Salary Earners' Banks: The stipulation regarding priority sector lending is not applicable to the Salary Earners' Banks.

3.4 Credit Flow to Minorities: 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.

4. Reporting / Monitoring under Priority Sector

4.1 UCBs should take effective steps to achieve the above recommended targets and monitor the priority sector lending, keeping in view the quantitative as well as qualitative aspects.

4.2 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).

4.3 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 15 days from the end of the period to which it relates.

4.4 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.

4.5 The reporting formats together with their periodicity are summarized as under :

4.6 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.

5. The detailed guidelines in this regard are given as under:

1. Agriculture

2. Small Enterprises

Direct Finance

2.1 Direct Finance in the small enterprises sector will include credit to :

2.1.1 Manufacturing Enterprises

(a) Small (manufacturing) Enterprises

Enterprises engaged in the manufacture / production, processing or preservation of goods and whose investment in plant and machinery [original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O. 1722 (E) dated October 5, 2006] does not exceed `5 crore.

(b) Micro (manufacturing) Enterprises

Enterprises engaged in the manufacture / production, processing or preservation of goods and whose investment in plant and machinery [original cost excluding land and building and such items as in 2.1.1 (a)] does not exceed `25 lakh, irrespective of the location of the unit.

2.1.2 Service Enterprises

(a) Small (service) Enterprises

Enterprises engaged in providing / rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) does not exceed `2 crore.

(b) Micro (service) Enterprises

Enterprises engaged in providing / rendering of services and whose investment in equipment [original cost excluding land and building and furniture, fittings and such items as in 2.1.2 (a)] does not exceed `10 lakh.

(c) The small and micro (service) enterprises shall include small road & water transport operators, small business, professional & self-employed persons, and all other service enterprises. Loans granted in respect of the following activities are also included under Micro and Small (Service) Enterprises within the priority sector subject to the enterprises satisfying the definition of Micro and Small (Service) Enterprises in respect of their investment in equipment (original cost excluding land and building and furniture, fitting and other items not directly related to the service rendered or as may be notified under the MSMED Act 2006 i.e., not exceeding `10 lakh and ` 2 cr respectively) :

(i) Consultancy Services including Management Services
(ii) Composite Broker Services in Risk and Insurance Management
(iii) Third Party Administration (TPA) services for Medical Insurance Claims of Policy holders
(iv) Seed Grading Services
(v) Training cum Incubator centre
(vi) Educational Institutions
(vii) Training Institutes
(viii) Retail Trade
(ix) Practice of Law i.e., legal services
(x)  Trading in medical instruments (brand new)
(xi) Placement and Management Consultancy Services and
(xii) Advertising agency and Training Centres

Note : Loans granted for Retail Trade (i.e., advances granted to retail traders dealing in essential commodities (fair price shops), consumer cooperative stores; and advances granted to private retail traders with credit limits not exceeding ` 20 lakh would be part of the Small (Service) Enterprise.

2.1.3 Khadi and Village Industries Sector (KVI)

All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery. Such advances will be eligible for consideration under the sub-target (60 per cent) of the small enterprises segment within the priority sector.

Indirect Finance

2.2 Indirect finance to the small (manufacturing as well as service) enterprises sector will include credit to :

2.2.1 Persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

2.2.2 Existing investments as on March 31, 2007, made by banks in special bonds issued by NABARD with the objective of financing exclusively nonfarm sector may be classified as indirect finance to Small Enterprises sector till the date of maturity of such bonds or March 31, 2010, whichever is earlier. Investments in such special bonds made subsequent to March 31, 2007 will, however, not be eligible for such classification.

2.2.3 Loans granted by scheduled UCBs to NBFCs for on-lending to small and micro enterprises (manufacturing as well as service

3. Micro Credit

3.1 Loans of amounts not exceeding `50,000 per borrower or the maximum permissible limit on unsecured advance whichever is lower.

3.2 Loans to poor indebted to informal sector Loans to distressed persons (other than farmers) to prepay their debt to non institutional lenders, against appropriate collateral , would be eligible for classification under priority sector.

4. State Sponsored Organizations for Scheduled Castes / Scheduled Tribes

Advances 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. Education

5.1 Educational loans granted to individuals for educational purposes 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.

5.2 Loans granted by scheduled UCBs to NBFCs for on-lending to individuals for educational purposes up to `10 lakh for studies in India and `20 lakh for studies abroad

6. Housing

6.2 Loans given for repairs to the damaged dwelling units of families up to `1 lakh in rural and semi-urban areas and up to `2 lakh in urban and metropolitan areas.

6.3 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 `5 lakh of loan amount per dwelling unit.

6.4 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.

6.5 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.

7. Loans to Self Help Groups (SHG) / Joint Liability Groups (JLGs):

8. Weaker Sections

(a) Small and marginal farmers with land holding of 5 acres and less, and landless labourers, tenant farmers and share croppers;

(b) Artisans, village and cottage industries where individual credit limits do not exceed `50, 000;

(c) Scheduled Castes , Scheduled Tribes and Women

(d) Loans to distressed poor to prepay their debt to informal sector, against appropriate collateral

(e) Education loans to persons having monthly income not exceeding `5000/-

(f) 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 (f) will cover only other notified minorities. These States / Union Territories are Jammu & Kashmir, Punjab, Sikkim, Mizoram, Nagaland and Lakshadweep.

(g) Lending to SHGs, which qualify as loans to priority sector, would also be treated as part of lending to weaker sections.

Note : Although no specific target for lending to agriculture both direct and indirect has been prescribed for UCBs, the classification mentioned herein should be used for monitoring the credit flow and reporting purposes.

State-wise List of Minority Concentrated Districts
(Vide para no 3.4)

Appendix
List of Circulars consolidated in the Master Circular