Banks seek to halve risk weight on mandated credit

Commercial banks have urged the Reserve Bank of India (RBI) to halve the risk weight assigned to all mandated lendings to 50 per cent. Their contention is that the reduction in the risk weight will help them boost advances to the priority sector significantly.

Reinforcing their argument, banks say that their big home loans push in the last couple of years is partly because of a reduction in the risk weight on home loans to 50 per cent from 100 per cent. Home loans, on an average, have witnessed a 30 per cent annual growth during the period.

As per the prudential norm pertaining to risk weight, banks have to hold capital in proportion to the risk of their various loans. Matching capital requirements to the overall riskiness of bank assets is aimed at ensuring sufficient resources to cover losses resulting from high-risk loans.

"By lowering the risk weight on loans to the priority sector, banks can maintain less capital against this loan category. This will allow them to extend credit to the priority sector at a lower cost." said a senior banker.

What is being envisaged is that the risk weight on loans given for setting up hospitals and nursing homes in rural areas should be lowered to 50 per cent. Further, the risk weight on loans backed by the pledge of gold ornaments is also being sought to be brought down to 20 per cent.

While pushing for widening the scope of priority sector lending, taking into account the prevailing growth drivers of the economy banks have impressed upon the RBI that credit extended for contract farming should be categorised as direct lending to agriculture.

Further, housing loans up to Rs 15 lakh in urban and metropolitan centers need to be considered as priority sector lending.

It is mandatory for public and private sector banks to extend 40 per cent of their net bank credit to the priority sector "" agriculture, small scale industry, education, self help groups, small transport operators, retail trade etc.