Notes Indian Banking System Part 2 PDF

# Notes Indian Banking System Part 2 ## 3.0 Structure Of Banking System In India ### 3.1 Classification of Banks in India #### 3.1.1 Commercial Banks **Meaning** - Commercial banks are institutions that accept deposits from the general public and advance loans with the purpose of earning profi...

# Notes Indian Banking System Part 2 ## 3.0 Structure Of Banking System In India ### 3.1 Classification of Banks in India #### 3.1.1 Commercial Banks **Meaning** - Commercial banks are institutions that accept deposits from the general public and advance loans with the purpose of earning profits. - The commercial banking sector in India is quite diverse. - Based on the ownership pattern, banks can be broadly categorised into public sector banks, private sector banks and foreign banks. - While the State Bank of India, Nationalised banks and Regional Rural Banks (RRBs) are constituted under respective enactments of the Parliament, the private sector banks and foreign banks are considered as banking companies as defined in the Banking Regulation Act, 1949. **Features** - Commercial banks are governed by the RBI as per the provisions of the Banking Regulation Act, 1949. - Priority Sector Lending (PSL) is applicable to commercial banks. - Both CRR and SLR are applicable to commercial banks, small finance banks, payment banks and RRBs. - Commercial banks can use Marginal Standing Facility (MSF) and Liquidity Adjustment Facility (LAF). - RRBs can also avail MSF and LAF since December 2020. - Voting power is dependent upon shareholding. - Prudential norms relating to Income Recognition and Asset Classification, Capital Adequacy, Exposures, etc. are applicable to commercial banks. #### 3.1.2 Co-operative Banks **Meaning** - A co-operative bank is a small-sized, financial entity, where its members are the owners and customers of the Bank. - Co-operative credit institutions are an important segment of the banking system, as they play a vital role in mobilising deposits and purveying credit to people of small means. - Traditionally, the co-operative institutional structure in India is divided into two categories viz. 'rural' and 'urban' with the rural cooperatives having a federal structure. - The present structure is graphically represented below. ##### Structure of Co-operative Credit Institutions in India | | Co-operative Credit Institutions | | |---|---|---| | Urban Co-operatives | | Rural Co-operatives | | | | | | Scheduled | Non-Scheduled | Long Term | Short Term | | Multi-State | Single State | Multi-State | Single State | | SCARDB-State Co-operative Agriculture and Rural Development Banks | PCARDB | StCB | DCCB | PACS | | PCARDB-Primary Co-operative Agriculture and Rural Development Banks | | | | | | StCB-State Co-operative Banks | | | | | | DCCB-District Central Co-operative Banks | | | | | | PACS-Primary Agricultural Co-operative Credit Societies | | | | | **Features** - Co-operative banks are registered under the respective State Co-operative Societies Act or Multi State Cooperative Societies Act, 2002, and governed by the provisions of the respective acts. - While regulation of State Cooperative Banks and District Central Cooperative Banks vests with the Reserve Bank, their supervision is carried out by National Bank for Agriculture and Rural Development (NABARD). - Members can cast only one vote, irrespective of the number of shares held. - PSL is applicable to UCBs. - Both CRR and SLR are applicable to cooperative banks. - Since August 2018, MSF is applicable to Scheduled Primary (Urban) Cooperative Banks; and LAF and MSF are applicable to Scheduled State Cooperative Banks. - Prudential norms relating to income recognition, asset classification, provisioning and capital adequacy ratio are applicable to urban co-operative banks as well. #### 3.1.3 Non-banking Financial Institutions (NBFIs) NBFIs can be divided in the following categories - - All-India Financial Institutions (AIFIs) - Primary Dealers (PDs) - Non-banking Financial Companies (NBFCs) ##### All-India Financial Institutions (AIFIs) - AIFIs constitute institutional mechanism entrusted with providing sector-specific long-term financing. - AIFIs play a crucial role in the financial markets through credit extension and refinancing operation activities and cater to the long-term financing needs of the industrial sector. - Prior to 2022, there were four AIFIs regulated and supervised by the Reserve Bank: - Export-Import Bank of India (EXIM Bank) - National Bank for Agriculture and Rural Development (NABARD) - National Housing Bank (NHB) - Small Industries Development Bank of India (SIDBI) - In October 2021, the RBI decided to implement the Basel III capital framework for all AIFIs. ##### National Bank for Financing Infrastructure and Development (NaBFID) - The National Bank for Financing Infrastructure and Development (NaBFID) Act came into force w.e.f. April 19, 2021. - Accordingly, NaBFID has been set up as a Development Financial Institution (DFI) to support the development of long-term infrastructure financing in India. - In March 2022, the RBI announced that NaBFID shall be regulated and supervised as an AIFI, making it the fifth AIFI after EXIM Bank, NABARD, NHB and SIDBI. **Functions of NBFID:** - NABFID will have both financial as well as developmental objectives. - Financial objectives will be to directly or indirectly lend, invest, or attract investments for infrastructure projects located entirely or partly in India. - Central government will prescribe the sectors to be covered under the infrastructure domain. - Developmental objectives include facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing. - Functions of NABFID include: - extending loans and advances for infrastructure projects, - taking over or refinancing such existing loans, - attracting investment from private sector investors and institutional investors for infrastructure projects, - organising and facilitating foreign participation in infrastructure projects, - facilitating negotiation with various government authorities for dispute resolution in the field of infrastructure financing, and - providing consultancy services in infrastructure financing. ##### Primary Dealers **Meaning** - In 1995, the Reserve Bank introduced the system of Primary Dealers (PDs) in the Government Securities Market. - PDs are controlled/ regulated by RBI. They are registered entities with the RBI who have the license to purchase and sell government securities. **Role of Primary Dealers** - PDs buy government securities directly from the RBI, aiming to re-sell them to other buyers. - In this way, the PDs create a market for government securities. - PDs play an active role in the Government securities market by underwriting and bidding for fresh issuances and acting as market makers for these securities. **Registration Requirements under SEBI** - PDs are required to meet registration and such other requirements as stipulated by the Securities and Exchange Board of India (SEBI), including operations on the Stock Exchanges, if they undertake any activity regulated by SEBI. **Eligibility** - The following classes of institutions are eligible to apply for Primary Dealership - - Subsidiary of scheduled commercial bank/s and AIFI/s dedicated predominantly to the securities business and in particular to the government securities market. - Subsidiaries/ joint ventures set up by entities incorporated abroad under the approval of Foreign Investment Promotion Board (FIPB). - Company incorporated under the Companies Act, 1956 and engaged predominantly in the securities business and in particular the government securities market. #### 3.1.4 Non-Banking Financial Companies (NBFCs) - Non-Banking Financial Companies (NBFCs) are the financial institutions, which are not banks but perform bank like functions especially the financial intermediation by mobilising the funds and extending credit. - They play a critical role in the financial system by providing last mile credit intermediation, absorbing and diversifying risks by catering to segments not serviced by banks and pioneering innovative financial products. - Thus, a 'financial institution' that is a company is an NBFC. - The term financial institution means any non-banking institution that carries on as its business (or part of its business) any of the following activities ('financial activities'): - Lending or financing for activities other than its own. - Acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority. - Leasing or hire-purchase. - Insurance business. - Chit business. - Collection of money. - Acceptance of deposits. - It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. - An NBFC is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business. #### 3.1.5 Regional Rural Banks **Introduction** **History** - Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Ordinance promulgated on 26th September 1975 and followed by the Regional Rural Banks Act, 1976. - RRBs were established with a view to develop the rural economy and to create a supplementary channel to the 'Cooperative Credit Structure' with a view to enlarge institutional credit for the rural and agriculture sector. **Meaning** - An RRB is a hybrid bank combining features of commercial banks and cooperative banks. Commercial banks have limited presence in rural areas due to less opportunities there, while cooperative banks are not that professional in their functioning. - There is a sponsor commercial bank over RRB, which provides it Human Resource Management (HRM) practices, technical and human training etc., to inculcate professionalism. - Like cooperative banks, RRBs operate in a selected and limited area only. - M Swaminathan is considered the father of RRBs. - RRBs are regulated by RBI and supervised by NABARD. - Prathama Bank, with head office in Moradabad, Uttar Pradesh was the first RRB. It was sponsored by Syndicate Bank and had an authorised capital of Rs. 5 crores. **Area of Operation** - The area of operation of the RRBs is limited to few notified districts in a State. - The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers, rural artisans and other segments of priority sector. **Shareholding Pattern** - The Central Government holds 50% in each of the RRBs, while their respective sponsor banks hold 35%. The balance 15% in RRBs is held by the respective State Governments. - The above holding can be changed as follows: - CG + sponsor bank = 51% - SG = 15% - Remaining- can be raised from the market. - The stake of State government can be reduced below 15% by consulting with that state. **Sources of Funds of RRBs** - The sources of funds of RRBs comprise of owned fund, deposits, borrowings from NABARD, Sponsor Banks, and other sources, including SIDBI and National Housing Bank.) **CRAR Norms** - Capital to Risk (Weighted) Assets Ratio (CRAR) norms are also applicable to RRBs. The income recognition, asset classification and provisioning norms as applicable to commercial banks are applicable to RRBs. (CRAR is to be covered in Basel norms.) **Amalgamation of RRBs** - The RBI in 2001 constituted a Committee under the Chairmanship of Dr V S Vyas on "Flow of Credit to Agriculture and Related Activities from the Banking System" which examined relevance of RRBs in the rural credit system and the alternatives for making it viable. - The consolidation process thus was initiated in the year 2005 as an off-shoot of Dr Vyas Committee Recommendations. - The first phase of amalgamation was initiated Sponsor Bank-wise within a State in 2005 and the second phase was across the Sponsor banks within a State in 2012. - The process was initiated with a view to provide better customer service by having better infrastructure, computerization, experienced work force, common publicity and marketing efforts, etc. - The amalgamated RRBs also benefit from larger area of operation, enhanced credit exposure limits for high value and diverse banking activities. - As a result of amalgamation, number of the RRBs has been reduced from 196 to 56 as on 31 March 2015. - The number of branches of RRBs increased to 20,024 as on 31 March 2015 covering 644 districts throughout the country. **Recapitalization of RRBs** - Dr. K.C. Chakrabarty Committee on “Recapitalization of RRBs for improving CRAR" had recommended recapitalization of 40 out of 82 RRBs for strengthening their CRAR to the level of 9 % by 31 March 2012. - According to the Committee, the remaining RRBs were in a position to achieve the desired level of CRAR on their own. - Accepting the recommendations of the Committee, the GOI along with other shareholders decided to recapitalize the RRBs by infusing funds to the extent of `2,200 Crore, with proportion being 50:35:15 for GOI; Sponsor Bank and State Government respectively. **Regional Rural Banks (Amendment) Act, 2015** - The Regional Rural Banks (Amendment) Act, 2015, came into effect from 4th February 2016. - The Act raises the amount of authorised capital to Rs. 2,000 crore and states that it cannot be reduced below Rs. 1 crore. - The Act allows RRBs to raise capital from sources other than the existing shareholders -central and state governments, and sponsor banks. Here, the combined shareholding of the central government and the sponsor bank cannot be less than 51%. - For the sponsoring banks, they can provide various initiating assistance to the RRBs beyond the initial five years (previously, the sponsoring bank’s responsibility will be over in five years). - The Act states that the central government may by notification raise or reduce the limit of shareholding of the central government, state government or the sponsoring bank in the RRB. For this, the central government may consult the state government and the sponsor bank. ## 3.2 Risk-based Internal Audit (RBIA) **What is RBIA?** - An effective Risk-Based Internal Audit (RBIA) is an audit methodology that links an organization’s overall risk management framework and provides an assurance to the Board of Directors and the Senior Management on the quality and effectiveness of the organization’s internal controls, risk management and governance related systems and processes. - The essential requirements for a robust internal audit function include sufficient authority, proper stature, independence, adequate resources and professional competence. **Who is it applicable to?** - The introduction of Risk-Based Internal Audit (RBIA) system was mandated for all Scheduled Commercial Banks (except Regional Rural Banks) in 2002. - In 2021, RBI decided to adopt the RBIA framework for the following Non-Banking Financial Companies (NBFCs) and Primary (Urban) Co-operative Banks (UCBs) as well: - All deposit taking NBFCs, irrespective of their size; - All Non-deposit taking NBFCs (including Core Investment Companies) with asset size of ₹5,000 crore and above; and - All UCBs having asset size of ₹500 crore and above. - Such entities were required to implement the RBIA framework by March 31, 2022. **Role of RBIA Framework** - The RBIA Guidelines are intended to enhance the efficacy of internal audit systems and processes followed by the NBFCs and UCBs. - Further, in order to ensure smooth transition from the existing system of internal audit to RBIA, the concerned NBFCs and UCBs may constitute a committee of senior executives with the responsibility of formulating a suitable action plan. - The internal audit function should broadly assess and contribute to the overall improvement of the organization’s governance, risk management, and control processes using a systematic and disciplined approach. The function is an integral part of sound corporate governance. - Historically, the internal audit system in NBFCs/UCBs has generally been concentrating on transaction testing, testing of accuracy and reliability of accounting records and financial reports, adherence to legal and regulatory requirements, etc. - However, in the changing scenario, such testing by itself might not be sufficient. Therefore, in addition to selective transaction testing, an evaluation of the risk management systems and control procedures in various areas of operations is needed. This will also help in anticipating areas of potential risks and mitigating such risks. **Who formulates the RBIA Policy?** - The Board of Directors (the Board) / Audit Committee of Board (ACB) of NBFCs and the Board of UCBs are primarily responsible for overseeing the internal audit function in the organization. - The RBIA policy shall be formulated with the approval of the Board and disseminated widely within the organization. **Risk Assessment** - The risk assessment process should include identification of inherent business risks in various activities undertaken, evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business activities. - The risk assessment may make use of both quantitative and qualitative approaches. While the quantum of credit, market, and operational risks could largely be determined by quantitative assessment, the qualitative approach may be adopted for assessing the quality of overall governance and controls in various business activities. **Note:** - NBFCs being financial service intermediaries are exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movements and risks pertaining to liquidity and solvency. - Further, the inter-connectedness of NBFCs with other participants in financial markets has increased over time with greater access to public funds. Consequently, risks of the NBFC sector can easily be transmitted to the rest of the financial system and vice-versa. - While regulations for NBFCs are simpler and lighter as compared to banks, there is a continuous evaluation done to ensure that NBFC regulations commensurate with the systemic impact that NBFCs can cause and certain financial market activities do not remain out of the regulatory purview. ## 3.3 Universal Vs Niche Banking ### 3.3.1 Universal Banks **Introduction** - A universal bank is nothing but a commercial bank with additional authority to act as an investment house. - It is a system through which banks offer their regular, retail, and high net worth customers a bouquet of comprehensive financial services, including customized or tailored investment, retail, and commercial services. - Universal banking helps service provider to build up long-term relationships with clients by catering to their different needs. - The client also benefits as he gets a whole range of services at lower cost and under one roof. **Universal Banking in India** - The Narasimham Committee II (1998) gave an introductory remark on the concept of Universal Banking, as a different concept than Narrow Banking. - The Committee suggested that DFIs should convert ultimately, into either commercial banks or NBFCs. - In 1997, the RBI set up a Working Group under the chairmanship of the then Chairman and Managing Director of IDBI, Shri S. H. Khan, to review the role, structure and operations of Development Financial Institutions (DFIs) and commercial banks in emerging operating environment and suggest changes. - The concept of Universal Banking was conceptualized in India after the Khan Working Group recommended it as a different concept. - The Group held the view that DFIs should be allowed to become banks at the earliest. - The thrust of the Group was on a progressive move towards universal banking and the development of an enabling regulatory framework for this purpose. - In January 1999, RBI released a Discussion Paper on “Harmonizing the role and operations of Financial Institutions and Banks”, in order to bring clarity on the roles of banks and Financial Institutions. - The feedback on the Paper indicated that while the universal banking was desirable from the point of view of efficiency of resource use, there was a need for caution in moving towards such a system. - ICICI Bank was the first financial institution in India, that adopted universal banking. ### 3.3.2 Types of Universal Banking Services - Universal banking services in India are broadly categorised into three types based on their functionality. They are as under: 1. **Investment Banking Services** - Such banks typically focus on providing services to various private investors and organisations. - Also known as merchant banking, these banks generally offer their clients assistance with asset management, investment advisory services, raising capital, mergers and acquisitions, securities underwriting and securities trading, among other facilities. 2. **Wholesale Banking Services** - Wholesale banking refers to banking services sold to large clients, such as corporations, other banks, and government agencies. - These services usually involve lending and borrowing funds on a large scale, compared to retail banking services that deal with comparatively smaller loan amounts for individual customers. 3. **Retail Banking Services** - Retail banking is the most common type of universal banking service available globally. - It is the type of banking that general bank customers and account holders are provided with. - Retail banking is a way for individual consumers to manage their money, have access to credit, and deposit their money in a secure manner. ### 3.3.3 Niche or Differentiated Banks **Introduction and History** - Differentiated banks are banking institutions licensed by the RBI to provide specific banking services and products. - Differentiated banks are distinct from universal banks as they function in a niche segment. - The differentiation could be on account of capital requirement, scope of activities or area of operations. - As such, they offer a limited range of services / products or function under a different regulatory dispensation. - In a sense, Urban Co-operative Banks (UCBs), Primary Agricultural Credit Societies (PACS), Regional Rural Banks (RRBs) and Local Area Banks (LABs) could be considered as differentiated banks as they operate in localized areas. - The main aim for giving license to differentiated banks is to promote financial inclusion. **Background** - The concept of differentiated banks was first discussed in 2007 in an RBI Technical Paper, when it was felt that the time was not yet opportune for such banks. - However, in 2008, the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan) had envisaged differentiated banks to further financial inclusion, by examining the relevance of small banks in the Indian context. - The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (Chairman: Shri Nachiket Mor), 2013 espoused the concept of differentiated banks to further the cause of financial inclusion and deepening the strategies, using the functional building blocks of payments, deposits and credits. - Thereafter, the concept was once again discussed in a Paper “Banking Structure in India - The Way Forward”, published by the RBI in August 2013. - The Paper looked into various aspects of the banking structure, licensing of banks, banking models and suggested a transition path for some banks. - The RBI granted in-principle approvals to 11 entities for setting up payments banks (PBs) in August 2015 and 10 entities for Small Finance Banks (SFB) in September 2015. **Types of Differentiated Banks:** | | Differentiated Banks | | |---|---|---| | | | | | | Payments Banks | Small Finance Banks | #### Small Finance Banks - Small finance banks (SFBs) are a type of niche banks that can provide basic banking service of acceptance of deposits and lending. - The aim behind these is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities. - They are established as public limited companies in the private sector under the Companies Act, 2013. - The minimum paid-up voting equity capital for SFBs is Rs. 200 crores. - SFBs will be required to extend 75 % of their Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by RBI. - Individuals/professions with 10 years of experience in finance, NBFCs, micro finance companies, and local area banks are eligible to set up SFBs. - Capital Small Finance Bank is India’s first small finance bank, founded in April 2016 as a microfinance lender, with its headquarters in Jalandhar. #### Payments Banks - Payments banks are new model of banks, conceptualized by the RBI, which cannot issue credit. - These banks can accept a restricted deposit, which is currently limited to 2,00,000 per customer and may be increased further. - These banks cannot issue loans and credit cards. - Both current account and savings accounts can be operated by such banks. - Payments banks can issue ATM cards or debit cards and provide online or mobile banking. - The minimum required paid-up equity capital for opening a payments bank according to RBI is Rs. 100 crore. - Bharti Airtel set up India’s first payments bank, Airtel Payments Bank, with its headquarters in New Delhi. It was launched in 2017. **Proposed Differentiated Banks** #### Custodian Banks - Custodian Banks are specialized financial institutions mainly responsible for safeguarding a firm’s or individual’s financial assets and are typically not engaged in conventional retail lending. #### Wholesale & Long-Term Finance Banks - In April 2017, RBI proposed to float a new type of differentiated banks called wholesale and long-term finance (WLTF) banks. - The report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, chaired by Dr. Nachiket Mor ('Nachiket Mor Committee Report') had envisaged a class of differentiated banks called Wholesale Banks. - Extending the Committee’s recommendations on Wholesale Banks, the Wholesale and Long-Term Finance (WLTF) banks will focus primarily on lending to infrastructure sector and small, medium & corporate businesses. - They will also mobilize liquidity for banks and financial institutions directly originating priority sector assets, through securitization of such assets and actively dealing in them as market makers. - They may also act as market-makers in securities such as corporate bonds, credit derivatives, warehouse receipts, and take-out financing etc. - These banks will provide refinance to lending institutions and shall be present in capital markets in the form of aggregators. - WLTF banks may also offer services related to equity / debt investments, and forex / trade finance to their clients. - These services, although similar in nature to the services offered by financial institutions traditionally known as ‘Investment Banks', would be ancillary to the primary activities of WLTF banks, which is deposits / loan products for wholesale clients and financing of infrastructure sector and core industries. ## 3.4 Priority Sector Lending **What is Priority Sector Lending (PSL)?** - The RBI decides to allot funds to predetermined priority sectors of the economy that may require credit and financial assistance. - Under PSL, the RBI directs banks to dedicate funds for specific sectors of the economy like agriculture, MSMEs, education and housing for the part of the population that is sometimes unable to get it. - The goal of PSL is to provide credit to the weaker sections of the society. - PSL guidelines are applicable to all Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks (LABs), and Urban Co-operative Banks (UCBs). **Categories under Priority Sector** - The categories under priority sector are as follows: - Agriculture - Micro, Small and Medium Enterprises - Export Credit (not applicable to RRBs and LABs) - Education - Housing - Social Infrastructure - Renewable Energy - Others #### Agriculture - The lending to agriculture sector includes Farm Credit (Agriculture and Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities. 1. **Farm Credit – Individual Farmers** - Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs) i.e., groups of individual farmers, (provided banks maintain disaggregated data of such loans) and Proprietorship firms of farmers, directly engaged in Agriculture and Allied Activities, viz. dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture. This will include: - Crop loans including loans for traditional/non-traditional plantations, horticulture and allied activities. - Medium and long-term loans for agriculture and allied activities. - Loans for pre- and post-harvest activities. - Loans to distressed farmers indebted to non-institutional lenders. - Loans under the Kisan Credit Card Scheme. - Loans to small and marginal farmers for purchase of land for agricultural purposes. - Loans against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months subject to a limit up to ₹75 lakh against NWRs/eNWRs and up to 50 lakh against warehouse receipts other than NWRs/eNWRs. (Negotiable warehouse receipt) - Loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps. - Loans to farmers for installation of solar power plants. 2. **Farm Credit – Corporate Farmers, Farmer Producer Organisations (FPOs)/(FPC) Companies of Individual Farmers, Partnership Firms and Co-operatives of Farmers engaged in Agriculture and Allied Activities** - Loans for the following activities will be subject to an aggregate limit of ₹ 2 crore per borrowing entity: Crop loans to farmers which will include traditional/non-traditional plantations and horticulture and loans for allied activities, Medium and long-term loans for agriculture and allied activities. - Loans for pre- and post-harvest activities. - Loans up to ₹ 75 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months against NWRs/eNWRs and up to ₹ 50 lakh against warehouse receipts other than NWRs/eNWRs. - Loans up to ₹ 5 crore per borrowing entity to FPOs/FPCs undertaking farming with assured marketing of their produce at a pre-determined price. - UCBs are not permitted to lend to co-operatives of farmers. **17. Agriculture Infrastructure** - Loans for agriculture infrastructure will be subject to an aggregate sanctioned limit of ₹ 100 crore per borrower from the banking system. **Ancillary Services** - Following loans under ancillary services will be subject to limits prescribed as under: - Loans up to ₹ 5 crore to co-operative societies of farmers for purchase of the produce of members (Not applicable to UCBs) - Loans up to ₹ 50 crore to start-ups that are engaged in agriculture and allied services. - Loans for food and agro-processing up to an aggregate sanctioned limit of ₹ 100 crore per borrower from the banking system. **Who are Small and Marginal Farmers (SMFs)?** - SMFs include the following: - Farmers with landholding of up to 1 hectare (Marginal Farmers). - Farmers with a landholding of more than 1 hectare and up to 2 hectares (Small Farmers). - Landless agricultural labourers, tenant farmers, oral lessees and share-croppers whose share of landholding is within the limits prescribed for SMFs. - Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e., groups of individual SMFs directly engaged in Agriculture and Allied Activities, provided banks maintain disaggregated data of such loans. - Loans up to ₹ 2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. - Loans to FPOs/FPC of individual farmers and co-operatives of farmers directly engaged in Agriculture and Allied Activities where the land-holding share of SMFs is not less than 75%. #### Micro, Small and Medium Enterprises (MSMEs) **Classification of MSMEs** | Enterprise | Investment in plant and machinery | Turnover | |---|---|---| | Micro Enterprises | Less than ₹ 1 crore | Less than ₹ 5 crore | | Small Enterprises | Less than ₹ 10 crore | Less than ₹ 50 crore | | Medium Enterprises | Less than ₹ 50 crore | Less than ₹ 250 crore | - All bank loans to MSMEs conforming to RBI guidelines qualify for classification under PSL. #### Export Credit (Note: Export Credit is not applicable to RRBs and LABs.) - Export credit under agriculture and MSME sectors are allowed to be classified as PSL in the respective categories viz. agriculture and MSME. - Export Credit (other than in agriculture and MSME) will be allowed to be classified as priority sector as per the following table: | | | | |---|---|---| | Domestic banks / WoS of Foreign banks/ SFBs/UCBS | Foreign banks with 20 branches and above | Foreign banks with less than 20 branches | | Incremental export credit over corresponding date of the preceding year, up to 2% of ANBC or CEOBE whichever is higher, subject to a sanctioned limit of up to 40 crore per borrower. | Incremental export credit over corresponding date of the preceding year, up to 2% of ANBC or CEOBE whichever is higher. | Export credit up to 32% of ANBC or CEOBE whichever is higher. | | (ANBC = Adjusted Net Bank Credit; CEOBE = Credit Equivalent amount of Off-Balance Sheet Exposure) | | | | (WOS = Wholly owned subsidiary) | | | #### Education - Loans to individuals for educational purposes, including vocational courses, not exceeding 20 lakh will be considered as eligible for priority sector classification. #### Housing 1. Bank loans to individuals for purchase/ construction/ repairs of dwelling units as per limits prescribed below are eligible for priority sector classification: | Location | Purpose | Loan Amount | Overall Cost of Dwelling Unit | |---|---|---|---| | Metropolitan (population more than 10 lakh) | Purchase/construction | Up to ₹ 35 lakh | Up to ₹ 45 lakh | | | Repairs | Up to ₹ 10 lakh | | | | Purchase/construction | Up to ₹ 25 lakh | Up to ₹ 30 lakh | | Other | Repairs | Up to ₹ 6 lakh | | - Housing loans to banks’ own employees will not be eligible for classification under the priority sector. - Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 sq.m. - Bank loans for affordable housing projects for dwelling units with carpet area of not more than 60 sq.m. #### Social Infrastructure - Bank loans to social infrastructure sector as per limits prescribed below are eligible for priority sector classification: 1. Bank loans up to a limit of ₹ 5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc. 2. Loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under 'Ayushman Bharat' in Tier II to Tier VI centres. 3. In case of UCBs, the above limits are applicable only in centres having a population of less than one lakh. #### Renewable Energy - Bank loans to renewable energy sector as per limits prescribed below are eligible for priority sector classification: 1. Bank loans up to a limit of ₹ 30 crore to borrowers for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities. 2. For individual households, the loan limit will be ₹ 10 lakh per borrower. #### Weaker Sections - Priority sector loans to the following borrowers will be considered as lending under Weaker Sections category: - Small and Marginal Farmers - Artisans, village and cottage industries where individual credit limits do not exceed ₹ 1 lakh - Beneficiaries under Government Sponsored Schemes such as National Rural Livelihood Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS) - Scheduled Castes and Scheduled Tribes - Beneficiaries of Differential Rate of Interest (DRI) scheme - Self Help Groups - Distressed farmers indebted to non-institutional lenders - Distressed persons other than farmers, with loan amount not exceeding ₹ 1