November 28, 2012

MA0037 [Banking Related Laws and Practices] Set2 Q5

Q 5. Explain the RBI guidelines for advances to priority sector and credit guarantee fund scheme. 


The need for primary (urban) co-operative bank (PCBs) for providing credit to priority sectors had been examined by the Standing Advisory Committee for PCBs constituted by Reserve bank of India in May1983.  The recommendations of the Committee were accepted by Reserve Bank of India and accordingly the targets for lending to priority sector and weaker section by the PCBs were stipulated.

1.1  Based on the recommendations made by the Standing Advisory Committee for CBs, the targets for lending to Priority Sector and weaker sections have been prescribed for the PCBs as given below:
1.1.1  60% of total loans and advances to priority sector and
1.1.2  Of the stipulated target for priority sector advances, at least 25% (or  15% of the total loans and advances) to weaker sections.

1.3 The stipulation regarding priority sector  lendings is not applicable to the Salary Earners' Banks.

1.4 The banks should make concerted efforts to achieve the targets and, if necessary, suitably simplify the systems and procedures keeping in view the types of beneficiaries to be financed.


2.1 The types of advances to be reckoned as priority sector advances and those of it to be considered as advances to weaker sections are indicated in Annexure I.

2.2 The definition of weaker section in priority sectors broadly corresponds to the beneficiaries under the 20-Point Economic Programme aimed at improving the standard of living of the weaker sections of the society.

2.3 For classifying priority sector advances under various categories, it may be noted that the banks should not merely take into account the purpose of the loan mentioned in the borrower’s loan application but also the amount involved and should satisfy themselves that the amount borrowed would be utilised for the purpose for which it was sanctioned, by calling for documentary evidence in support thereof, wherever considered necessary.  For example, loans to small traders or small businessmen are essentially in the nature of working capital loans and they have to be given primarily against the hypothecation or pledge of the goods in which they are dealing and therefore loans to small traders or small businessmen against gold or jewellery may not necessarily be the loans for undertaking trade or business. Similarly, in the case of a loan for construction of a house, it would have to be satisfied that the borrower has the land and his construction plans bear the approval of the competent authority or he has joined some co-operative society to construct the house.

Mere security of jewels coupled with indication of "housing" as purpose in the loan application should not satisfy the bank for classification of priority sector advances.

2.4 Therefore, loans against gold ornaments (jewel loans) which are in a majority of cases availed of by the weaker sections of the society, the purpose of the loan and the loan amount actually sanctioned to each borrower and not the security therefor, should be adopted as the criteria for classification of the priority sector advances and advances given to weaker sections of the society.


3.1 The banks should step up the credit flow to meet the legitimate requirements of tiny and SSI. The credit requirements of the tiny industries should be given preferential treatment while providing credit to this sector. Besides, preferential treatment in providing credit to tiny industries, full working capital limits determined on the basis of “need” related to the rated capacity of the unit should be sanctioned at the  commencement itself.  The bank’s decision regarding credit assistance should be communicated to the applicant as early as possible. Requests for increase in the limits should be considered expeditiously and decisions may be taken and conveyed promptly.

3.2 The bank’s officials/branch managers should be made aware of the importance of the SSI Sector from the point of view of creation of additional employment opportunities, exports etc.

A healthy growth of the sector will facilitate smooth loan recovery in the SSI borrowal accounts and timely assistance will prevent the  accounts  from  becoming  sticky.  Banks’ staff  should  be  imparted proper training and the aforesaid aspects should form part of inputs in the training provided.  There should be an interaction between the banks’ staff and the SSI borrowers as part of the training programme.

3.3 With a view to providing better customer service and to ensure that all loan  applications relating to SSI/Small borrowers are disposed of expeditiously, the following norms may be adhered to by all the banks provided the loan applications received are complete in all respects and duly accompanied by a check list, if prescribed.
3.3.1 Loan applications in respect of loans up to Rs.25,000/- to SSI/Small borrowers etc. may be disposed of within two weeks from the date of receipt of loan application,
3.3.2 Other cases of loans upto Rs.5  lakh may be disposed of within a period of four weeks from the date of receipt of duly completed loan application.
3.3.3 All such loan applications which are complete in all respects and accompanied by check list where prescribed, should be acknowledged by the bank/branch, on the day the application is received.


4.1 Primary (urban) co-op. banks 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, Zorastrians and Buddhists.

4.2 The banks should submit a half yearly statement (as on 31 March/30 September) within 15 days of the close of the relevant half year, showing the progress made in deployment of credit to these communities, to the concerned Regional Office of this department under whose jurisdiction they function, in the format given in Annexure II.



5.1 Primary (urban) co-operative banks should take effective steps to achieve the above recommended targets and monitor the priority sector lendings from the quantitative and qualitative aspects. 

5.2 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 30 September and 31 March of each year giving a detailed critical account of theperformance of the bank during the period showing increase/decrease over the previous half-year as per the proforma given in Annexure III.

5.3 A copy of the annual review as on 31 Marc h 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 month from the end of the period to which it relates.

The Reserve Bank of India panel has put forward a proposal to double the guarantee provided under a government scheme. This will enable the small businessmen to get collateral-free loans for up to Rs 10 lakh from banks.

On Saturday finance Minister Pranab Mukherjee released RBI report in which it has proposed that banks should not insist for collateral or guarantees from small businesses for loans up to Rs 10 lakh. Report stated for such loans the security will be provided under a guarantee by Credit Guarantee Fund Trust for medium and small enterprises (CGTSME).

The report also suggested for reducing guarantee fees for women entrepreneurs and for enterprises in the North-East. In April’09 RBI in its monetary policy had set up a working group to review the Credit Guarantee Scheme of the Credit Guarantee Fund Trust. While launching the report the finance minister said, “This constitutes an important initiative by government for MSMEs to avail bank credit without the hassle of collateral or third-party guarantee.” 

RBI report has been launched seven months after RBI had instructed banks that they cannot ask for collateral security for loans up to Rs 5 lakh given to micro and small enterprises in manufacturing and service sector.

After the meeting with Sebi, on Saturday, the finance minister held discussion with the members of the board of RBI. Mr Mukherjee said, “Various aspects of budget proposal were analysed and board members gave their comments and inputs about budgetary proposals”.

Later on the finance minister said the government will be taking up the consolidation among the public sector banks in consultation with RBI if the banks themselves contacted with the proposals.

The finance minister said, “So far the regional rural banks have come forth and consolidation among RRBs have taken place. I have also made proposal that there should be licenses for new banks and of course they should meet the criteria fixed by the RBI”.

Regarding the food inflation the finance minister said there has been a trade off between the increase in the prices of cereals and food security. Indicating towards the current inflation the finance minister said it is not because of monetary expansion, the price rise in wholesale basket is largely due to food items.

He added, “Cereals are not un-available but cereal prices increased because procurement price have been benchmarked at a high level. If you procure one quintal of wheat at Rs 1,100 and your total procurement is 34% of total production, naturally the retail benchmark cannot be less than Rs 13-14 per kg. Similarly, if you procure one quintal of paddy at Rs 1,050 after conversion charges, mandi charges, and other taxes rice at retail level cannot be more than Rs 19.45”.

The minister said, “There is a cost push ingredient in the high prices of these cereals. But it was inevitable if farmers do not get remunerative prices they will not produce enough. because of these prices farmers are producing enough there is no shortage of food stock”.

Giving a reply of a question on the pace of fiscal consolidation the finance minister said, “Fiscal consolidation does not contradict growth. Without fiscal consolidation growth will not be sustainable. One of the reasons we could with stand the pressure of the international financial crisis was because of our fiscal consolidation and adherence to FRBM which also achieved for three years high growth performance at the rate of 9%”.

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