The Reserve Bank of India (RBI) warned banks of breaching priority sector lending norms. It asked lenders to stop the practice of including off-balance items in meeting priority sector credit targets. Off-balance sheet items include instruments like letter of credit (LC), bank guarantee (BG), derivative instruments (currency hedging) and others.
"It has come to notice that some banks have included contingent liabilities/off-balance sheet items as part of priority sector target achievement," RBI said in a release issued on Friday.
"In this connection, we clarify that this is not in conformity with priority sector lending guidelines. Therefore, banks are advised to declassify such accounts with retrospective effect, where a contingent liability / off-balance sheet item is treated as a part of priority sector target achievement."
Those credit tools (off-balance sheet items or contingent liabilities) are mostly considered indirect form of credit. For example, an issuer bank of BG will be held liable to pay the debt only when the original borrower on whose name BC is issued, fails to repay. Till that time, it is not exactly a direct credit.
PSL target
Banks are mandated to achieve 40% priority sector lending (PSL) that includes agricultural credit, housing loan up to Rs 20 lakh, SME (small and medium enterprises) credit and others. Most of the banks especially private sector ones are likely to miss the target.
What if PSL target is missed?
Banks which fail to attain PSL target are mandated to invest in Nabard or Rural Infrastructure Development Fund (RIDF) bonds for the shortfall. The rate of interest in those bonds are very low in the range of 3 to 6%.
"We also clarify that all types of loans, investments or any other item which are treated as eligible for classifications under priority sector target/ sub-target achievement should also form part of adjusted net bank credit," RBI said.
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