Mid-Term Review of the Annual Policy Statement for 2008-09, RBI Credit Policy, Reserve Bank of India: Banknet India

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Mid-Term Review of the Annual Policy Statement for 2008-09

Part B. Mid-term Review of Annual Statement on Developmental and Regulatory Policies for the Year 2008-09

III. Credit Delivery Mechanisms and Other Banking Services

a) Priority Sector Lending

(i) Weaker Sections’ Lending Targets: Status

148. As indicated in the Annual Policy Statement of April 2008, domestic SCBs were advised that the shortfall in achievement of the sub-target of lending to weaker sections will also be taken into account for the purpose of allocating amounts for contribution to the Rural Infrastructure Development Fund (RIDF) maintained with the National Bank for Agriculture and Rural Development (NABARD) or funds with other financial institutions as specified by the Reserve Bank, with effect from April 2009.

(ii) General Purpose Credit Cards and Overdrafts Against ‘No-frills’ Accounts as Indirect Finance to Agriculture Under Priority Sector: Status

149. Consequent upon the announcement made in the Annual Policy Statement of April 2008, banks were allowed to classify 100 per cent of the credit outstanding under General Credit Cards (GCC) and overdrafts up to Rs.25,000 (per account) granted against ‘no-frills’ accounts in rural and semi-urban areas as indirect finance to agriculture under the priority sector.

(iii) Increasing Opportunities for RRBs for Lending to Priority Sector: Status

150. With a view to augmenting RRBs’ funds/resource base, commercial banks/sponsor banks were allowed to classify in their books loans granted to RRBs for on-lending to agriculture and allied activities as indirect finance to agriculture. Furthermore, RRBs were permitted to sell loan assets held by them under priority sector categories in excess of the prescribed priority sector lending target of 60 per cent.

(b) Delivery of Credit to Agriculture and Other Segments of the Priority Sector

151. Under the Special Agricultural Credit Plan (SACP), disbursements by public and private sector banks to agriculture aggregated Rs.1,25,758 crore (provisional) and Rs.47,862 crore, respectively, during 2007-08 as against the target of Rs.1,52,133 crore and Rs.41,427 crore. Under the kisan credit card (KCC) scheme, public sector banks have issued 4.6 million KCCs covering limits aggregating Rs.59,582 crore during 2007-08. Since the inception of the scheme, public sector banks have issued 31.22 million KCCs covering an amount of Rs.1,54,294 crore.

152. The Union Budget for 2008-09 had announced establishment of the Rural Infrastructure Development Fund (RIDF XIV) with the NABARD with a corpus of Rs.14,000 crore, and a separate window under RIDF (XIV) for rural roads programme under the Bharat Nirman Programme with a corpus of Rs.4,000 crore. The Union Finance Minister had also announced setting up of specific funds with the NABARD/Small Industries Development Bank of India (SIDBI)/National Housing Bank (NHB) with contributions by SCBs which failed to achieve their obligations to lend to the priority sector.

153. Since the inception of the RIDF (I to XIV), including separate windows under RIDF for rural roads under the Bharat Nirman Programme, the total allocation was of the order of Rs.86,000 crore. While cumulative sanctions to State Governments and the National Rural Roads Development Agency (NRRDA) under various tranches of RIDF (I to XIV) stood at Rs.79,920 crore and Rs.12,000 crore, respectively, as on August 31, 2008 the cumulative disbursements stood at Rs.48,615 crore and Rs.4,889 crore, respectively. During 2008-09 (up to August 31), various State Governments were sanctioned loans aggregating Rs.5,864 crore, which included Rs.522 crore sanctioned to the distressed districts of four States, viz., Andhra Pradesh, Kerala, Karnataka and Maharashtra. The disbursements under various tranches of RIDF during the year 2008-09 (up to August 31) amounted to Rs.3,021 crore.

(c) Interest Subvention Relief to Farmers

154. Pursuant to the announcement made in the Union Budget for 2006-07, commercial banks were advised to grant interest relief of two percentage points in the interest rate on the principal amount on each crop loan up to Rupees one lakh granted by banks during Kharif and Rabi seasons of 2005-06. Furthermore, consequent upon announcements made in the Union Budgets for the years 2007-08 and 2008-09, public sector banks, RRBs and rural co-operative banks were advised to grant interest rate subvention of 2 per cent per annum to farmers in respect of short-term production credit up to Rupees three lakh provided to them.

(d) Simplification of Lending Procedures for Crop Loans

155. As announced in the Annual Policy Statement of April 2008, banks were advised to accept affidavits submitted by landless labourers, share croppers and oral lessees giving occupational status(i.e., details of land tilled/crops grown) for loans up to Rs.50,000, where there are difficulties in getting certification from local administration/panchayati raj institutions regarding the cultivation of crops. Furthermore, banks were advised to select one rain-fed district for introduction of a cyclical credit product for financing crop production on pilot basis, where 20 per cent of the limit would be continuously available to farmers as a core component.

(e) Agricultural Debt Waiver and Debt Relief Scheme, 2008

156. A scheme of agricultural debt waiver and debt relief for farmers was announced in the Union Budget for 2008-09 for implementation by all SCBs, RRBs and cooperative credit institutions. The modalities of the scheme were finalised and notified by the Government of India on May 23, 2008. The scheme covers direct agricultural loans extended to marginal and small farmers and other farmers by SCBs, RRBs, cooperative credit institutions (including urban cooperative banks) and local area banks (LABs). Accordingly, the Reserve Bank advised all SCBs, including LABs, to take necessary action towards expeditious implementation of the scheme. The NABARD issued similar guidelines to RRBs and cooperatives. The Reserve Bank also advised all SCBs, including LABs, to utilise at their discretion the floating provisions held for advances portfolio to the extent of meeting the interest/charges (i.e., interest in excess of the principal amount, unapplied interest, penal interest, legal charges, inspection charges, miscellaneous charges and the like). The floating provisions should not, however, be utilised for meeting any other provisioning requirements without the Reserve Bank’s prior approval, as hitherto.

157. Under the scheme, the Government had agreed to provide to commercial banks, RRBs and co-operative credit institutions a sum of Rs.25,000 crore as the first instalment. At the request of the Government, the Reserve Bank has agreed to provide the sum to the lending institutions immediately. This temporary liquidity support provided by the Reserve Bank of India under Section 17(3-B) and Section 17(4-E) of the RBI Act to scheduled banks and the NABARD, respectively, is available till November 3, 2008.

(f) Promotion of Livelihood in the Unorganised Sector: Role of Financial System

158. As indicated in the Annual Policy Statement of April 2008, the report of the Internal Working Group constituted within the Reserve Bank to study the recommendations of the National Commission for Enterprises in the Unorganised Sector (Chairman: Dr. Arjun K. Sengupta) in its report on ‘Conditions of Work and Promotion of Livelihood in the Unorganised Sector’ was placed on the Reserve Bank’s website for wider dissemination.

(g) Working Group on Rehabilitation/Nursing of Potentially Viable Sick SME Units

159. As indicated in the Annual Policy Statement of April 2007, the report of the Working Group (Chairman: Dr. K. C. Chakraborty), constituted to look into the issues and suggest remedial measures so that potentially viable sick units can be rehabilitated at the earliest, was placed on the Reserve Bank’s website in April 2008. Based on the comments received, it is proposed:

to issue detailed guidelines to banks on rehabilitation of potentially viable sick SME units by end-November 2008.

(h) SHG-Bank Linkage Programme

160. The self help group (SHG)-Bank Linkage programme has emerged as the major micro-finance programme in the country and is being implemented by commercial banks, RRBs and cooperative banks. As on March 31, 2008, 3.48 million SHGs had outstanding bank loans of Rs.22,227 crore. During 2007-08, banks financed 0.74 million SHGs, including repeat loans to existing SHGs to the tune of Rs. 4,228 crore.

(i) Financial Inclusion Fund and Financial Inclusion Technology Fund

161. In the Union Budget for 2007-08, constitution of the Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund (FITF) were announced with an overall corpus of Rs.500 crore each with the NABARD. The Government of India also advised that for the year 2007-08, the initial contribution of Rs.25 crore each in these two Funds would be shared by the Central Government, the Reserve Bank and the NABARD in the ratio of 40:40:20. The Reserve Bank’s contribution to these funds would accordingly be Rs.10 crore each.

(j) Regional Rural Banks (RRBs)

(i) Branch Licensing: Further Liberalisation

162. In order to give further impetus to branch expansion programmes of RRBs, existing branch licensing criteria have been further liberalised. Accordingly, it is proposed:

to allow RRBs greater flexibility in opening new branches as long as they are making operational profits and their financials are improving.

(ii) Technology Upgradation of RRBs

163. As indicated in the Annual Policy Statement of April 2008, the report of the Working Group (Chairman: Shri G. Srinivasan), constituted for preparing a road map for RRBs to adopt appropriate technology and migrate to core banking solutions (CBS), was placed on the Reserve Bank’s website. The Report has set September 2011 as the target for all RRBs to move towards CBS and all RRB branches opened after September 2009 are to be CBS-compliant. The report has been forwarded to all sponsor banks for necessary action.

(iii) Assistance to RRBs for Adoption of ICT solutions for Financial Inclusion: Status

164. The report of the Working Group (Chairman: Shri G. Padmanabhan), constituted to examine provision of financial assistance to RRBs for defraying a part of their initial cost in implementing information and communication technology (ICT)-based solutions for financial inclusion, was placed on the Reserve Bank’s website in August 2008. The Group has inter alia recommended that the funding of ICT solutions for financial inclusion may be done through interest-free loans to be routed through the Institute for Development and Research in Banking Technology (IDRBT). The recommendations are under examination.

(k) Financial Inclusion

(i) Pilot Project of State Level Bankers’ Committee (SLBCs) for 100 per cent Financial Inclusion

165. So far, 342 districts were identified by SLBCs for 100 per cent financial inclusion. Of these, 155 districts have reported having achieved the target of 100 per cent financial inclusion. The Reserve Bank had undertaken evaluation studies of the progress made in achieving this target in 26 districts through external agencies to draw lessons for further action in this regard. Based on the findings of the studies, it is proposed to:

provide feedback to banks to make the process of financial inclusion more effective. (ii) Special Task Force in North-Eastern Region

166. Consequent to the meeting that the former Governor of the Reserve Bank had with the Chief Ministers of a few States in the North-Eastern Region in May 2008, a Special Task Force (Chairperson: Smt. Usha Thorat) was constituted in order to give a fresh impetus for setting up of banking facilities at additional centres in the region perceived as essential for public policy. A scheme of providing financial support to banks by the Reserve Bank for setting up banking facilities (currency chests, extension of foreign exchange and Government business facilities) at such centres, provided that the State Governments make available necessary premises and other infrastructural support, has been formulated. The Government of Meghalaya has agreed to the proposal of providing premises and necessary security arrangements for the new branches. Similar mechanisms for other States in the North-Eastern region where requests have been received are under consideration.

(iii) Setting up of Credit Counseling Centres on Pilot Basis

167. A concept paper on Financial Literacy and Counselling Centres was prepared and placed on the Reserve Bank’s website on April 3, 2008 for public feedback in order to take this initiative forward. Based on the feedback, it is proposed:

to notify a Model Scheme for Financial Literacy and Credit Counselling Centres. (l) High Level Committee on Lead Bank Scheme

168. As announced in the Mid-Term Review of October 2007, a High Level Committee (Chairperson: Smt. Usha Thorat) was constituted to review the Lead Bank Scheme and improve its effectiveness in the light of the recent developments in the banking sector. The Committee had several rounds of discussions with different State Governments, banks and other stakeholders, including academicians, micro-finance institutions and NGOs, and is in the process of consolidating its findings and crystallising its recommendations. The broad view that is emerging is that while greater banking and credit penetration by the formal financial institutions for facilitating inclusive growth should be the primary objective of the scheme, it would also be necessary to strengthen the institution and processes through which the scheme is implemented. The Committee is expected to submit its report by December 2008.

(m) Relief Measures by Banks in Flood affected areas in Assam, Bihar and Orissa

169. The Reserve Bank has issued comprehensive standing instructions to banks for ensuring continuity of banking operations and providing relief and rehabilitation to persons affected by natural calamities. Consequent to the unprecedented rains and floods resulting in heavy losses of life and property in the States of Assam, Bihar and Orissa, special committees/meetings of banks and State Governments at district/State level, as appropriate, were held to trigger the implementation of these standing instructions which include re-scheduling of existing loans, grant of fresh credit and consumption loans, making available currency in adequate measures and ensuring continuance of normal banking services.

(n) Study on Courier/Postage Charges of Banks

170. The Annual Policy Statement of April 2008 indicated that the Reserve Bank is in the process of collecting details of various charges levied by banks for public dissemination with a view to bringing about greater transparency in banks’ services to the common person. Accordingly, information in respect of courier/postage charges levied for collection of outstation cheques and for sending statements/cheque books to the customer was collected, compiled and placed on the Reserve Bank’s website. The Reserve Bank would conduct such studies from time to time in respect of other charges and will place the results on its website.

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