Banks' VC outlay loses priority lending cushion

The Reserve Bank of India (RBI) today decided to withdraw its sanction for banks' investments in venture capital funds as priority sector lending.

The decision has been taken following a review of the "growth of investment in venture capital vis-a-vis other sectors" and also the overall growth in credit.

RBI said fresh investments by banks in venture capital from today onwards will no longer be reckoned under priority sector lending. All investments in venture capital up to June 30, 2005 will become ineligible for classification under priority sector lending with effect from April 1, 2006, RBI said in a circular to all commercial banks.

RBI had in July 2004 allowed banks to reckon as priority sector lending investments in venture capital funds registered with the Securities and Exchange Board of India.

Banks have been asked to align their priority sector lending suitably so as to comply with the fresh guidelines.

Indian commercial banks have been set a target of lending 40 per cent of their net credit to priority sector. The overall limit includes sub-targets of 18 per cent and 10 per cent for lending to agricutlure and weaker sections of the population, respectively.