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Click here to return to main page of Annual Policy Statement 2008-09

Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2008-09

II. Credit Delivery Mechanisms and Other Banking Services

(a) Augmenting RRBs' Funds for Lending to Agriculture and Allied Activities

135. With a view to augmenting RRBs' funds/resource base, commercial banks/sponsor banks have been allowed to classify loans granted to RRBs for on-lending to agriculture and allied activities as indirect finance to agriculture in their books.

(b) Weaker Sections' Lending Target: Ensuring Adherence

136. In terms of the revised guidelines on lending to priority sector effective from April 30, 2007 domestic SCBs are required to lend 40 per cent of adjusted net bank credit (net bank credit plus investments made by banks in non-SLR bonds held in the held to maturity category) or credit equivalent of off-balance sheet exposures, whichever is higher, to the priority sector. These SCBs are also required to lend at least 18 per cent to the agriculture sector and 10 per cent to weaker sections covering small and marginal farmers with land holding of five acres and less; landless labourers, tenant farmers and share croppers; artisans, village and cottage industries where individual credit limits do not exceed Rs. 50,000; beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), Swarna Jayanti Shahari Rozgar Yojana (SJSRY), the Scheme for Liberation and Rehabilitation of Scavengers (SLRS) and the Differential Rate of Interest (DRI) scheme; scheduled castes and scheduled tribes; self-help groups (SHGs); and distressed poor who have to prepay their debt to the informal sector against appropriate collateral or group security. It has been observed that banks have not been achieving the sub-target of 10 per cent for lending to weaker sections. At present, domestic SCBs having shortfall in the priority sector lending target and/or the agriculture sub-target are allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) maintained with the National Bank for Agriculture and Rural Development (NABARD). It is, therefore, proposed:

to take into account shortfall in lending to weaker sections also for the purpose of allocating amounts to the domestic SCBs for contribution to RIDF or funds with other financial institutions as specified by the Reserve Bank, with effect from April 2009

. (c) Increasing Opportunities for Flow of Credit to Priority Sectors

137. In terms of the revised guidelines on lending to the priority sector, SCBs can undertake outright purchase of any loan asset eligible to be categorised under the priority sector from other banks and financial institutions and classify the same under the respective categories of priority sector lending (direct or indirect), provided the loans purchased are held at least for a period of six months. To enable greater flow of credit to the priority sectors, it is proposed:

to allow RRBs to sell loan assets held by them under priority sector categories in excess of the prescribed priority sector lending target of 60 per cent.

(d) Simplification of Lending Procedures for Crop Loans

138. The Working Group (Chairman: Shri C.P.Swarnkar) appointed by the Reserve Bank and the Committee on Agricultural Indebtedness (Chairman: Dr.R.Radhakrishna) appointed by the Government of India made several recommendations to address credit constraints faced by farmers, including the issue of availability of cash throughout the year for agricultural operations. The report of the Internal Working Group (Chairman: Shri V.S.Das), set up by the Reserve Bank to examine the recommendations of the Radhakrishna Committee, has been placed on the Reserve Bank's website for wider consultation.

139. While action on the recommendation of the Radhakrishna Committee will be finalised based on comments/responses received, it is proposed:

to ask each domestic commercial bank, including RRBs, to select one district for introduction, on a pilot basis, of a simplified cyclical credit product for farmers to enable them to continuously utilise a core component of 20 per cent of the credit limit. This arrangement should ensure minimum year-round liquidity as long as the interest is serviced.

to introduce a simplified procedure for crop loans to landless labourers, share croppers, tenant farmers and oral lessees whereby banks can accept an affidavit giving details of land tilled/crops grown by such persons for loans up to Rs.50,000 without any need for independent certification. Banks could also encourage the Joint Liability Group (JLG)/SHG mode of lending for such persons.

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

140. The National Commission for Enterprises in the Unorganised Sector (Chairman: Dr. Arjun K. Sengupta) had submitted to the Central Government a report on 'Conditions of Work and Promotion of Livelihood in the Unorganised Sector' which had suggested a package of measures for addressing some critical issues relating to farm and non-farm sectors. The report of the Internal Working Group constituted within the Reserve Bank to study the recommendations of the National Commission that are relevant to the financial system and to suggest an appropriate action plan would be placed on the Reserve Bank's website by May 15, 2008.

(f) Banking Code for Micro and Small Enterprises

141. In collaboration with the Indian Banks' Association (IBA), the Banking Codes and Standards Board of India (BSCBI) is evolving a banking code for small and micro enterprises which will go a long way in empowering the sector.

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

142. As indicated in the Mid-Term Review of October 2007, a Working Group (Chairman: Dr.K.C.Chakraborty) was constituted with representatives from banks and the Small Industries Development Bank of India (SIDBI) to examine the feasibility of SMEs bringing in additional capital through alternative routes such as equity participation and venture financing and to suggest remedial measures for those potentially viable sick units that can be rehabilitated at the earliest. The report of the Group has been placed on the Reserve Bank's website for wider dissemination/response.

(h) Strengthening Regional Rural Banks and Enhancement of their Operational Efficiency: Status

143. As indicated in the Mid-Term Review of October 2007, a Working Group (Chairman: Shri G.Srinivasan) has been constituted with representatives from the NABARD, sponsor banks and RRBs in order to prepare RRBs to adopt appropriate technology and migrate to core banking solutions for better performance and improved customer services. The Group is expected to submit its report by June 30, 2008.

144. The Task Force for Improving the Operational Efficiency of RRBs (Chairman: Dr.K.G.Karmakar), set up in 2006, had submitted its report to the Reserve Bank in February 2007. While some action points have been referred to the Government of India, action has already been taken on accepted recommendations and the remaining are under examination.

(i) Revival of Rural Co-operative Credit Structure: Status

145. Based on the recommendations of the Task Force on Revival of Rural Co-operative Credit Institutions (Chairman: Prof.A.Vaidyanathan) and in consultation with State Governments, the Government of India had approved a package for revival of the short-term rural cooperative credit structure. So far, 20 States (Andhra Pradesh, Arunachal Pradesh, Bihar, Chhattisgarh, Gujarat, Haryana, Jammu and Kashmir, Karnataka, Madhya Pradesh, Maharashtra, Meghalaya, Nagaland, Orissa, Punjab, Rajasthan, Tamilnadu, Tripura, Uttarkhand, Uttar Pradesh and West Bengal) have executed Memoranda of Understanding (MoUs) with the Government of India and the NABARD, as envisaged under the package. Seven States have made necessary amendments in their Cooperative Societies Acts. An aggregate amount of Rs.3,325.12 crore has been released by the NABARD as the Government of India's share and State Governments have released their shares to the tune of Rs.333.93 crore to seven States for recapitalisation assistance of Primary Agricultural Credit Societies (PACS).

146. Implementation and monitoring of the revival package are being overseen by the National Implementing and Monitoring Committee (NIMC) set up by the Government of India. Furthermore, a study of the long-term cooperative credit structure was entrusted to the Task Force by the Government of India, which had submitted its report in August 2006. It was announced in the Union Budget 2008-09 that the Central Government and the State Governments have reached an agreement on the content of the package for revival of the long-term cooperative credit structure. The cost of the package is estimated at Rs.3,074 crore, of which the Central Government's share will be Rs.2,642 crore.

(j) Micro-finance: Status

147. The 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, 2007, 28.94 lakh SHGs had outstanding bank loans of Rs.12,366.49 crore. While commercial banks accounted for 70.8 per cent of the outstanding loans, RRBs and cooperative banks accounted for 22.7 per cent and 6.5 per cent, respectively.

148. Out of 290 banks reporting data on recovery to the NABARD as on March 31, 2007, 73 per cent of banks had more than 80 per cent recovery on loans given to SHGs.

(k) Financial Inclusion

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

149. So far, 277 districts have been identified for 100 per cent financial inclusion and the target has been achieved in 134 districts in 18 States and five Union Territories. Notably, all districts of Haryana, Himachal Pradesh, Karnataka, Kerala, Uttarakhand, Puducherry, Daman and Diu, Dadra & Nagar Haveli and Lakshadweep have achieved 100 per cent financial inclusion. An evaluation of the progress made in achieving 100 per cent financial inclusion in these districts is being undertaken to draw lessons for further action in this regard.

(ii) General Purpose Credit Cards and Overdrafts Against 'No-frills' Account as Indirect Finance to Agriculture Under Priority Sector

150. With a view to providing credit card like facilities in rural areas with limited point-of-sale (POS) and limited automated teller machine (ATM) facilities, all SCBs, including RRBs, were advised in December 2005 to introduce a General Credit Card (GCC) Scheme for their constituents in rural and semi-urban areas, based on the assessment of income and cash flow of the household similar to that prevailing under normal credit cards. Banks also provide a small overdraft facility against basic banking 'no-frills' accounts. At present, 50 per cent of the credit outstanding under GCC is allowed to be classified as indirect finance to agriculture under the priority sector. It is proposed:

to permit banks to classify 100 per cent of the credit outstanding under GCC and overdrafts up to Rs.25,000 against 'no-frills' accounts in rural and semi-urban areas as indirect finance to agriculture under the priority sector.

(iii) Working Groups on Improvement of Banking Services in Lakshadweep, Himachal Pradesh and Jharkhand

151. As indicated in the Mid-Term Review of October 2007, Working Groups were constituted to undertake studies of banking services in the Union Territory of Lakshadweep and States of Himachal Pradesh and Jharkhand. The Working Groups have submitted their reports and their recommendations have been forwarded to the respective agencies through regional offices of the Reserve Bank for implementation.

(iv) Differential Rate of Interest (DRI) Scheme: Eligibility Limits Raised

152. The limit of loans under the DRI Scheme was raised from Rs.6,500 to Rs.15,000 and that of housing loans under the Scheme from Rs.5,000 to Rs.20,000 per beneficiary, on the basis of the announcements made in the Union Budget for 2007-08. Consequent upon the announcement made in the Union Budget for 2008-09 the borrower's eligibility criterion in terms of annual family income has been raised to Rs.18,000 in rural areas and Rs.24,000 in urban areas.

(v) Concept Paper on Financial Literacy and

Counselling Centres

153. The Mid-Term Review of October 2007 had indicated that a concept paper on Financial Literacy and Counselling Centres would be prepared and placed on the Reserve Bank's website. Accordingly, a concept paper on Financial Literacy and Counselling Centres has been prepared and placed on the Reserve Bank's website on April 3, 2008 for public feedback in order to take this initiative forward.

(vi) Financial Literacy

154. Lack of knowledge among common persons with respect to financial services and financial planning is a major reason for financial exclusion. The Reserve Bank launched Project Financial Literacy with a view to creating awareness, especially among common persons, on matters relating to banking, finance and the central bank for promoting financial inclusion. The literacy campaign is targeted at groups such as rural folk, urban poor, school/college children, women, senior citizens and defence personnel. A multilingual website for common persons was launched in July 2007. This was followed by a number of initiatives such as having a section on financial education on the Reserve Bank's website, educational books for children and rural folk in the form of comics, participation in fairs/exhibitions through educational displays/exhibits/ interactive games. Notably, the Reserve Bank put up an exhibition on the evolution of banking in India since Independence aboard the Azadi Express, a train run by the Government of India all over the country to celebrate 60 years of India's Independence. The Reserve Bank also organised essay competitions across the country to generate interest among the children in the area of banking and finance. A Young Scholar's Internship Award Scheme, designed at giving opportunity to young college students to work as interns with the Reserve Bank during their vacations, is under implementation.

(vii) Assistance to RRBs for Adoption of ICT Solutions

155. As indicated in the Mid-Term Review of October 2007, a Working Group (Chairman: Shri G. Padmanabhan) was constituted to examine providing financial assistance to RRBs for defraying a part of their initial cost in implementing Information and Communication Technology (ICT)-based solutions, including installation of solar power generating devices for powering ICT equipment in remote and under-served areas. The Group has since submitted its report, which is under examination.

(viii) Ex-Servicemen, Retired Government/Bank Employees to act as Business Correspondents

156. In the Union Budget for 2008-09, the Finance Minister indicated that individuals such as retired bank officers, ex-servicemen and others would be allowed to be appointed as credit counsellors. Accordingly, guidelines for allowing retired bank/government employees and ex-servicemen as business correspondents were issued on April 24, 2008.

(l) Review of Lead Bank Scheme

157. The Lead Bank Scheme, introduced in 1969, aimed at coordinating the activities/efforts of banks, State Governments and other developmental agencies for promoting overall development of the rural sector. Although the Scheme was reviewed in 1989 when the service area approach was adopted, there have been significant changes in the financial system in the post-reform period. More recently, there is increased focus on financial inclusion. At the same time, planning has become more decentralised with greater devolution of expenditure to the grassroots levels. In the revised context and in order to improve the effectiveness of the Scheme as announced in the Mid-Term Review of October 2007, a High Level Committee (Chairperson: Smt. Usha Thorat) with members drawn from various financial institutions, banks and State Governments was constituted to review the Lead Bank Scheme. The Committee has so far held seven meetings and has interacted with most of the State Governments and banks. Interactions are also proposed with academics and Non-Governmental Organisations (NGOs). The Committee is expected to submit its report by July 2008.

(m) Credit Delivery, Credit Pricing and Credit Culture

158. In the Mid-Term Review of Monetary and Credit Policy of November 2003, the importance of adequate, timely and hassle free credit delivery, appropriate credit pricing related to risk and a conducive credit culture was emphasised. Since then, there have been several developments including doubling of credit to agriculture, significant rise in credit to the small and medium enterprises (SMEs) sector, administered interest rates for crop loans, one time settlement (OTS) and rescheduling/restructuring schemes for distressed farmers, simplification of procedures and other measures such as adoption of business correspondent (BC) model and use of smart cards. The regulations under the Credit Information Companies Act have been notified and soon new credit information companies will be authorised to commence business. This is expected to reduce information asymmetry and facilitate efficient credit allocation and pricing while fostering a better credit culture. While concessional credit and debt relief schemes are intended to alleviate farmers' distress and reopen the credit lines that have been choked, sustaining an appropriate credit culture going forward would require incentive systems for greater flow and efficient allocation of credit. Accordingly, it is proposed:

to set up an Internal Working Group to look at issues relating to credit delivery, credit pricing and credit culture in a holistic manner.

(n) Banks' Services to the Common Person and Transparency in Charges Levied

159. In the last few years, the Reserve Bank has been focusing on safeguarding the interest of common persons in their interface with banks while improving the ease and efficiency of conducting banking transactions. The measures taken by the Reserve Bank include setting up of the Banking Codes and Standards Board of India, revamping the Banking Ombudsman scheme, constitution of board-level customer service committees in banks, dissemination of customer-centric information in local languages and promoting fair and transparent policies and practices, especially in the matter of bank charges, interest rates, customer acquisition and debt collection. Banks have also responded positively, including adoption of the Code of Commitment to their customers. Nevertheless, analyses of the types, frequency and trends of complaints reaching the Reserve Bank and the offices of the Banking Ombudsmen suggest that the essence of the Code still needs to percolate down to the level of the customer service delivery interface in banks. Banks, therefore, need to pay closer attention to these aspects, particularly, sensitivity of the staff to meeting the legitimate expectations of customers. They also need to ensure that they have in place effective internal arrangements for customer grievance redressal.

160. In 2007, on account of concerns about high bank charges and excessive interest rates in personal segment, the Reserve Bank laid down principles for ensuring reasonableness of bank charges and communicating them in respect of identified basic banking services. Banks were also cautioned against excessive interest rates, which are not sustainable and may be seen as usurious and broad guidelines in this regard were laid down. For greater transparency in setting interest rates banks were advised that they must use external or market-based rupee benchmark interest rates for pricing their floating rate loan products. The Reserve Bank has, thus, attempted to involve banks' boards in implementation of various guidelines to ensure fairness, reasonableness and transparency in bank charges for various services and setting interest rates and use of external transparent benchmark for this purpose while giving them flexibility on consideration of commercial judgement. It is expected that banks' boards will take necessary care that these objectives are met and need for more prescriptive regulation is avoided.

161. With a view to bringing about greater transparency, the Reserve Bank is in the process of collecting details of various charges levied by banks for public dissemination.

(o) Currency Management

162. Currency management continues to be guided by benchmarks set in terms of operational efficiency and improved customer service. All currency chest branches of banks have been equipped with note sorting machines to ensure quality and genuineness of bank notes in circulation. These machines segregate notes into fit and unfit categories and facilitate timely detection of counterfeit notes. During 2007-08, soiled notes to the tune of 27 per cent of notes in circulation were withdrawn from circulation while fresh notes to the extent of 37 per cent were introduced with a view to ensuring adequate supply of notes of all denominations and to improve the quality of bank notes in circulation. In order to ensure that all bank branches provide better customer services to members of public at bank counters for exchange of notes, it is proposed:

to introduce a scheme of incentives and penalties for bank branches (including currency chests), based on their performance in rendering such services.

Click Here For Highlights of Annual Policy Statement for the Year 2008-09

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