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Flow of Credit to SSI Sector - Interest Rates on Deposits with SIDBI in lieu of Priority Sector Obligations

In terms of the recommendation of the Ganguly Working Group in regard to evaluation of methods of utilisation of deposits made by foreign banks with SIDBI for shortfall in their priority sector obligation, Reserve Bank has now linked interest payments on to the extent of the shortfall in the priority sector targets. The higher the shortfall, the lesser will be the interest that foreign banks will receive on their deposits with Sidbi.

Basically, this is to discourage the practice of banks which prefer to deposit funds with Sidbi considering the returns of 6%, instead of meeting the target. Foreign banks are required to deploy 32% of net bank credit to the priority sector (which includes exports, SSI and agriculture lending).

The shortfall against this target is deposited with Sidbi, fetching them 6% which is the Bank Rate. Sidbi had earlier approached the central bank seeking a reduction in the interest rates on the grounds that the institution’s cost of funds was lower than the interest that paid out to foreign banks.

In the revised circular issued on 8th December 2004, RBI has said that if the shortfall is less than 2%, Sidbi will pay interest at the Bank Rate. If shortfall is more than 2%, but less than 5%, then the foreign bank will receive interest on its deposits with Sidbi at Bank Rate minus 1%.

Further, when the shortfall is above 5%, but less than 9%, the interest rate will be Bank Rate minus 2% and once the shortfall is above 9%, the interest will be the Bank Rate minus 3%.

The scheme would be made effective from the financial year 2005-06 so that foreign banks have adequate time to plan deployment of their resources.

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