Priority lending to be linked to disbursals

The Reserve Bank of India (RBI) today proposed to link computation of priority sector lending obligations to the total disbursements made during the previous year from 2007-08. Since inception, flow of credit to priority sectors was linked to individual bank's net bank credit.

A draft technical paper by RBI's internal working group on priority sector lending said the change in computation has been proposed to improve the flow of credit to priority sectors and to ensure that a certain proportion of funds out of the total bank credit flows to this sector.

The report said the targets for banks under this system would have to be determined separately after obtaining from banks the figures of segment-wise actual disbursements during the last five years.

Bank are expected to put in place the necessary mechanism for the change in computation of priority sector lending before it becomes applicable from 2007-08.

To ensure a smooth switchover to the new regime, the banks should develop suitable management information systems to maintain and compile segment-wise data relating to disbursements, recoveries, NPAs and rates of interest.

RBI has been maintaining that the focus of agricultural lending by banks should be on direct lending and had gradually phased out some modes of indirect financing.

The report said more items could be considered for being ineligible for priority sector status. These include loans to electricity boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energising their wells, loans to state electricity boards for systems improvement scheme and finance for hire purchase schemes for distribution of agricultural machinery and implements.

Advances to state-sponsored corporations for onward lending to weaker sections and loans to national co-operative development corporation (NCDC) for onlending to the co-operative sector would also become ineligible.

The report said all indirect finance to agriculture may be considered for a weightage of 25 per cent only for the purposes of reckoning under agriculture segment of priority sector.

The present ceiling of 4.5 per cent (i.e. 25 per cent of 18 per cent) for lending under indirect finance to agriculture would consequently stand withdrawn.