Following the Reserve Bank of India’s (RBI) objection, government-owned UCO Bank has declassified loans worth Rs 4,000 crore. Since these loans were tagged as agriculture loans, the lender has failed to meet the priority sector lending target for 2010-11.
According to RBI norms, banks are mandated to finance 18 per cent of the previous year's adjusted net bank credit to the agriculture sector.
The norms for loans to be classified as priority sector loans were revised last year. In 2010-11, RBI had told banks that loans given to semi-government bodies, which work as market intermediaries in agriculture lending, would not be treated as priority sector lending, but as corporate loans. The step was aimed at encouraging banks to lend directly towards agricultural activities.
“These loans were given to Rural Electrification Corporation that would deploy the funds in setting up pumps. However, RBI felt these could not be classified as agriculture loans,” Kaul said.
UCO Bank also reported a drop in retail lending in 2010-11. Overall, the bank saw a credit growth of 20 per cent, compared to the previous financial year. The growth was mainly driven by corporate credit.
In a recent meeting, the finance ministry had asked public sector banks to boost lending to the agricultural sector, since it felt a large part of the farm sector was still deprived from any formal source of finance.
According to the RBI's Trend and Progress Report-2010, a host of public and private sector banks failed to lend 18 per cent of their net bank credit to the agriculture sector, as mandated by the banking regulator. Within agricultural lending, banks are supposed to directly lend 13.5 per cent of net bank credit to agricultural activities, while 4.5 per cent can be advanced to activities related indirectly to agriculture.