Priority Sector Advances for JAIIB 2022

Priority Sector Advances: In IIBF JAIIB PPB paper, Priority sector advances is the first topic you need to cover. This is one of the important topic of JAIIB PPB exam, if you are looking to score well and clear the JAIIB 2022 exam. In this blog you will understand what is Priority sector advances.

National Credit Council

• In July 1968, the Government of India emphasised that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries.
• The description of the priority sectors was later formalised in 1972 on the basis of the report submitted by the informal study group on statistics relating to advances to the priority sectors constituted by the Reserve Bank in May 1971.
• Based on the recommendations of the working group on the modalities of implementation of priority sector lending and the twenty point economic programme by banks, all commercial banks were advised to achieve the target of priority sector lending at 40 per cent of the aggregate bank advances by 1985
• Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups

CATEGORIES OF PRIORITY SECTOR

1. Agriculture (Direct and Indirect finance)
   • Direct finance to agriculture would include; short-, medium- and long-term loans
     given for agriculture and allied activities (dairy, fishery, piggery, poultry,
     beekeeping, etc.) directly to individual farmers, self-help groups (SHGs) or joint
     liability groups (JLGs) of individual farmers without limit and to others (such as
     corporates, partnership firms and institutions) up to certain limits, for taking up
     agriculture and allied activities.
   • Indirect finance to agriculture shall include loans given for agriculture and allied
     activities to those engaged in distribution of inputs like fertilizers, pesticides, seeds,
     cattle and poultry feeds, etc., and to State Electricity Boards and such other
     organizations.
     
2. Small Enterprises (Direct and Indirect Finance)
   • Direct finance to small enterprises includes all loans given to micro and small
     (manufacturing) enterprises engaged in the manufacture/production, processing or
     preservation of goods, and micro and small (service) enterprises engaged in providing or rendering of services, and whose investment in plant and machinery and equipment (original cost excluding land and building and such items). The micro and small (service) enterprises shall include small road and water transport operators, small business professional and self-employed persons, and all other service enterprises.
   • Indirect finance to small enterprises shall include finance to any person providing inputs to or for marketing the output of artisans, village and cottage industries, handlooms and to co-operatives of producers in this sector.
3. Retail Trade: Includes retail traders/private retail traders dealing in essential commodities (fair price shops), and consumer co-operative stores.
4. Micro Credit: Provision of credit and other financial services and products of very small amounts not exceeding Rs.50,000 per borrower, either directly or indirectly through a SHG/JLG mechanism or to NBFC/MFI for on-lending up to Rs. 50,000 per borrower, will constitute micro credit.
5. Education Loans: Education loans include loans and advances granted to only individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad, and do not include those granted to institutions.
6. Housing Loans: Loans up to Rs. 20 lakh to individuals for purchase/ construction of a dwelling unit per family, (excluding loans granted by banks to their own employees) and loans given for repairs to the damaged dwelling units of families up to Rs. 1 lakh in rural and semi-urban areas and up to Rs. 2 lakh in urban and metropolitan areas.
   

TARGETS/SUB-TARGETS

• Within the overall main lending target of 40 per cent of net bank credit, banks should ensure that eighteen per cent of net bank credit goes to agricultural sector, 10 per cent of net bank credit is given to the ‘weaker sections’ and one per cent of previous year’s total advances is given under the Differential Rate of Interest (DRI) scheme. Non-achievement of priority sector targets and sub-targets will be taken into account by RBI while granting regulatory clearances/approvals for various purposes.
• The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below
  
  

Total Priority Sector Advances

• For Domestic Commercial Banks: Forty per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off balance sheet exposure, whichever is higher.
• For Foreign Banks: Thirty-two per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher.

Total Agricultural Advances

• Eighteen per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher. Of this, indirect lending in excess of 4.5 per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher, will not be reckoned for computing performance under the 18 per cent target.
• However, all agricultural advances under the categories ‘direct’ and ‘indirect’ will be reckoned in computing of performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is
  higher. (No target for foreign banks)
  

Small Enterprise Advances

Advances to small enterprises sector are taken in consideration for computing performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher. (For foreign banks, it is 10 per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher.

Micro Enterprises within Small Enterprises Sector

(i) Forty per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh;
(ii) Twenty per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. Thus, 60 per cent of the small enterprises advances should go to the micro enterprises. The target for foreign banks is the same as that for domestic banks.

Advances to Weaker Sections

Ten per cent of ANBC or credit equivalent amount of off balance sheet exposure, whichever is higher. No target for foreign banks.

RECENT DEVELOPMENTS IN PRIORITY SECTOR LENDING

The salient features of the guidelines are:

• The Government will provide interest subvention of 2 per cent p.a. to the banks
  in respect of short- term production credit up to Rs, 3 lakh provided to farmers
• The amount of subvention will be calculated on the loan amount from the date of
  disbursement/ withdrawal up to the date of payment or up to the date loan becomes overdue. This subvention will be available to banks on the condition that they make
  short-term credit available at the ground level with ROI of 7 per cent per annum.
• The RBI has advised banks to form farmers’ advisory committee in all rural branches. This committee will play a vital role in the rural development and it will not only strengthen the extension system, but will also make it more reliable and transparent by proper planning and resource allocation.
• A branch advisory committee comprising of select elected representatives, including women leaders of local Panchayat Raj institutions, within the service area of the branch, is established at every rural branch. It should meet at least once in a quarter. These meetings are made mandatory and are to be attended by the controlling official of the bank.