...................“One possible solution could involve domestic banks doing more agriculture lending and foreign banks doing more SME (small and medium enterprises) lending,” Rajan said at an investor summit organized by Citigroup in Boston, on Thursday. Under the current RBI norms, foreign banks with 20 branches or more, in India, have a target of 40% priority sector lending of their total lending. This is on par with all domestic banks in India. Foreign banks with less than 20 branches have a priority sector lending target of 32%. Foreign banks have long argued for more liberal priority sector norms since they do not have an extensive branch network and access to rural areas. “Financial inclusion is a long-term positive and will help in bringing in more deposits into the banking system,” Rajan said..............
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The concept of priority sector lending was introduced to ensure credit flow from the banking sector to certain neglected sectors including agriculture. The need for some persuasion to encourage banking system to provide adequate credit to priority sector is still there as banks on their own would prefer to deploy credit in bigger urban ventures. Several attempts to shift responsibility by lending to service/consumer sectors, investing in RIDF etc were allowed to achieve priority sector targets. Internal reviews by RBI or at state level forums also concentrated on ‘targets’ and their achievement and a comprehensive look at willingness and capability of each bank to finance priority sector especially in rural areas is yet to happen.
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