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Daily News RBI Credit Policies (1999-2005)
Part II. Review of Annual Statement on Developmental and Regulatory Policies for the Year 2005-06
Credit Delivery Mechanisms
(a) Flow of Credit to Agriculture
70. It has been the endeavour of the Reserve Bank to improve the agricultural credit delivery mechanism to enable banks to provide adequate and timely finance at reasonable rates. As indicated in the annual policy Statement of April 2005, most of the recommendations of the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System (Chairman: Prof. V.S. Vyas) have been implemented by the Reserve Bank and the National Bank for Agriculture and Rural Development (NABARD). A few recommendations of the Committee are under examination of the Government. Public sector banks are required to formulate special agricultural credit plans (SACP) in order to achieve distinct improvement in the flow of credit to agriculture. During 2004-05, disbursements to agriculture by public sector banks under SACP aggregated Rs.65,218 crore against the projection of Rs.55,616 crore. By end-June 2005, public sector banks had issued 183.5 lakh kisan credit cards (KCCs) with aggregate limits amounting to Rs.62,000 crore. As announced in the Union Budget for 2005-06, the Rural Infrastructure Development Fund (RIDF) XI has been established with the NABARD with a corpus of Rs.8,000 crore. Cumulative sanctions and disbursements till August 2005 under various tranches of RIDF (I to XI) amounted to Rs.44,389 crore and Rs.26,693 crore, respectively.
(b) Priority Sector Lending
71. It was indicated in the annual policy Statement of April 2005 that prescriptions on eligibility criteria and other aspects relating to priority sector lending need to be reviewed and examined in depth. In this context, an Internal Working Group (Chairman: Shri C. S. Murthy) was set up by the Reserve Bank to review the existing policy on priority sector lending including the segments constituting the priority sector, targets and sub-targets and recommend changes as necessary. The draft technical paper of the Group has been placed on the Reserve Bank’s website for wider dissemination and comments. The technical paper has also been sent to the Government and the IBA for their views.
(c) Credit Flow to Small and Medium Enterprises
72. As a sequel to the announcement made by the Hon’ble Finance Minister in the Parliament on August 10, 2005 in regard to a policy package for stepping up credit to small and medium enterprises, banks were advised to take action as under:
• Units with investment in plant and machinery in excess of the small scale industries (SSI) limit and up to Rs.10 crore would be treated as medium enterprises (ME) and only SSI financing would be included in priority sector lending.
• Banks would fix their own targets for financing the SME sector so as to reflect a higher disbursement over the immediately preceding year, while the
sub-targets for financing tiny units and smaller units to the extent of 40 per cent and 20 per cent, respectively, would continue.
• Banks would initiate necessary steps to rationalise the cost of loans to the SME sector by adopting a transparent rating system with the cost of credit linked to the credit rating of the enterprise.
• Banks should make concerted efforts to provide credit cover, to at least five new small/medium enterprises per year on an average, at each of their semi urban/urban branches.
• Boards of banks would formulate liberal and comprehensive policies for extending loans to the SME sector.
• Banks should increasingly adopt the cluster-based approach for financing the SME sector.
• Banks would ensure presence of specialised SME branches in identified clusters/centres with preponderance of medium enterprises to provide SME entrepreneurs easy access to bank credit and also equip their personnel with requisite expertise. The existing specialised SSI branches would also be redesignated as SME branches. Though their core competence will be utilised for extending finance and other services to the SME sector, they will also have operational flexibility to extend finance/render other services to other sectors/borrowers.
• Policy guidelines formulated by the boards of banks, all facilities/schemes offered by them to small entrepreneurs and instructions/guidelines issued by the Reserve Bank should be displayed on the websites of banks, the SIDBI and at each bank branch for wider dissemination and easy accessibility.
73. The Reserve Bank has constituted empowered committees at its regional offices to review the progress in SME financing and rehabilitation of sick SSI and ME units so as to ensure smooth flow of credit to these sectors. The Reserve Bank has also formulated a one-time settlement scheme for recovery of non-performing assets (NPAs) below Rs.10 crore for SME accounts and detailed guidelines have been issued to public sector banks for implementation. A debt restructuring mechanism for units in the SME sector, in line with the corporate debt restructuring (CDR) mechanism prevailing in the banking sector, has been formulated by the Reserve Bank and guidelines were issued for implementation.
(d) Restructuring and Development of Regional Rural Banks
74. As indicated in the annual policy Statement of April 2005, an Internal Group (Chairman: Shri A. V. Sardesai) was set up by the Reserve Bank to examine various alternatives available within the existing legal framework for strengthening regional rural banks (RRBs) and making them viable rural financial institutions. The Group submitted its report in June 2005 which has been sent to the Government for comments. The major recommendations of the Group include merger/amalgamation of RRBs to improve operational viability, change of sponsor banks to enhance competitiveness, strengthening of balance sheets in respect of merged entities, regulatory and supervisory strengthening, governance and management and scope for improving profitability.
(e) Micro-finance
75. The programme of linking self-help groups (SHGs) with the banking system continues to be the major micro-finance programme in the country and is being implemented by commercial banks, RRBs and co-operative banks. By
end-July 2005, as many as 16,53,047 SHGs were linked to banks and the total flow of credit to SHGs was Rs.7,063 crore.
76. The following measures have been initiated to give further impetus to the micro-finance endeavour:
• In pursuance of the Union Budget, 2005-06, the Micro Finance Development Fund (MFDF) set up in the NABARD has been redesignated as the Micro Finance Development and Equity Fund (MFDEF) and its corpus has increased from Rs.100 crore to Rs.200 crore. The modalities in regard to the functioning of the MFDEF are being worked out.
• The Internal Group (Chairman: Shri H.R. Khan) constituted by the Reserve Bank to examine issues relating to rural credit and micro-finance submitted its report in July 2005 which was placed on the Reserve Bank’s website for wider dissemination. Important recommendations of the Group include providing comprehensive financial services in rural areas encompassing savings, credit, remittance, insurance and pension products and establishing linkages between banks and external entities based on two broad models, viz., business facilitator model and business correspondent model. The Group has also suggested several steps to promote SHGs and micro-finance institutions (MFIs) which include future growth of SHG-Bank Linkage and MFI-Bank Linkage programmes, utilisation of MFDEF funds to facilitate formation of SHG federations for offering services like rural housing loans, micro-insurance and tie-up with service providers, development of accounting standards for SHGs and NGOs, capacity building of MFIs, rating of MFIs, development of rating models and training modules for MFIs. The recommendations of the Group are under examination.
(f) Revival of Rural Co-operative Banking Institutions and Long-term Co-operative Credit Structure
77. The Task Force appointed by the Government (Chairman: Prof. A. Vaidyanathan) to propose an action plan for reviving the rural co-operative banking institutions and suggesting an appropriate regulatory framework for these institutions submitted its report in February 2005. The Government has accepted the recommendations of the Task Force, in principle, and held consultative meetings with the State Governments. The Government has entrusted the work of studying the long-term co-operative credit structure for agriculture and rural development to the Task Force.
(g) Special Relief Measures by Banks in Areas Affected by Natural Calamities
78. The Reserve Bank has issued guidelines/instructions to banks in regard to relief measures to be provided in areas affected by natural calamities from time to time. These guidelines cover various relief measures pertaining to credit to existing borrowers, mainly in the agricultural sector. During recent calamities such as tsunami, heavy rains, floods and earthquakes in some parts of the country, a number of instances relating to functioning of ATMs, opening of accounts of small customers, operations of accounts in the absence of documents and failure of computer networks have come to the notice of the Reserve Bank. Accordingly, it is proposed to constitute an internal Working Group to examine the whole gamut of issues and suggest suitable revisions to the existing guidelines, with a view to making them comprehensive.
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