Volume IX Issue 01 July 2012
MONETARY AND CREDIT INFORMATION REVIEW
Revised Guidelines on Priority Sector Lending
The Reserve Bank has revised the guidelines on priority
sector lending - targets and classification. The highlights of
the revised priority sector guidelines, which have become
operational from July 20, 2012, are:
• Overall target under priority sector is retained at 40 per cent.
• The targets for both direct and indirect agricultural lending are
kept unchanged at 13.5 per cent and 4.5 per cent of adjusted
net bank credit, respectively.
• The following important activities, among others, form part of
priority sector lending :
Loans to micro and small service enterprises up to
Rs.1 crore and all loans to micro and small
Loans up to Rs. 25 lakh for housing in metropolitan
centres of population above 10 lakh and Rs.15 lakh at
Loans to food and agro processing units.
Loans to individuals for educational purposes
including for vocational courses up to Rs. 10 lakh in
India and Rs. 20 lakh abroad.
Loans for housing projects exclusively for economically
weaker sections and low income groups, provided the
cost does not exceed Rs. 5 lakh per dwelling unit.
Loans to distressed farmers indebted to non
Overdrafts up to Rs.50,000 in no-frills accounts.
Loans to state sponsored organisations for scheduled
castes and scheduled tribes.
Loans to individuals for setting up of off-grid solar and
other off-grid renewable energy solutions for
Loans to individuals other than farmers up to Rs. 50,000
to prepay their debt to non-institutional lenders.
Foreign banks having 20 or more branches in the
country will be brought on par with domestic banks for
priority sector targets in a phased manner over a
maximum period of 5 years starting from April 1, 2013.
They will be required to submit an action plan for
achieving the targets over a specific time frame to be
approved by the Reserve Bank.
Foreign banks with less than 20 branches will have no
sub-targets within the overall priority sector lending
target of 32 per cent. This is expected to allow them to
lend as per their core competence to any priority sector
Bank loans to primary agricultural credit societies
(PACS), farmers' service societies (FSS) and large
adivasi multi-purpose co-operative societies (LAMPS)
ceded to or managed/controlled by such banks for onlending
to farmers for agricultural and allied activities
are included under direct agriculture.
Investments by banks in securitised assets, outright
purchases of loans and assignments to be eligible for
classification under priority sector provided, the
underlying assets qualify for priority sector treatment
and the interest rate charged to the ultimate borrower
by the originating entity does not exceed Base Rate of
such bank plus 8 per cent per annum.
Priority sector loans sanctioned under the earlier
guidelines i.e., prior to July 20, 2012 will continue to be
classified under priority sector till maturity/renewal.
Interest Rates on NRE/NRO/FCNR(B) Accounts
Banks have been advised not to allow the benefit of
additional interest rate on any type of deposits of non-residents.
Accordingly, the discretion given to banks to allow the benefit of
additional interest rate of one per cent per annum to their own
staff, on deposits under non-resident (external) (NRE)/nonresident
(ordinary) (NRO)/FCNR(B) accounts stands withdrawn.
Lower MDR for Debit Card Transactions
With a view to encouraging the use of debit cards,
especially at smaller merchants/service providers and location
by way of lower merchant discount rate (MDR), it has been
decided, in consultation with the stakeholders, to cap the MDR
for transactions undertaken with debit cards as under:
These directions will become operational from September 1, 2012.
NEFT - Rationalisation of Customer Charges
On a review and in consultation with stakeholders, it has
been decided to rationalise the customer charges levied by
banks for national electronic funds transfer (NEFT) transactions
(exclusive of service tax)
Amounts up to Rs. 10,000
Amounts from Rs.10,001 to Rs. 1 lakh
|Amounts above Rs. 1 lakh up to Rs. 2 lakh
|Amounts above Rs. 2 lakh
The above charges which are effective from August 1,
2012, are the maximum that can be recovered by banks from
their customers, if they so desire. Banks have been advised to
encourage customers to take advantage of this facility.
Priority Sector Lending Targets/Sub-targets for Domestic and Foreign Banks operating in India
Domestic Commercial Banks/Foreign Banks with 20 and above Branches
Foreign Banks with less than 20 Branches
Total priority sector
40 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure, whichever is higher.
32 per cent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.
18 per cent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.
No specific target. Forms part of total priority sector target.
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 achievement under 18 per cent target. However, all agricultural loans under the categories ‘direct’ and ‘indirect’ will be reckoned in computing achievement under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.
Micro and small enterprises (MSEs)
(i) Advances to micro and small enterprises sector will be reckoned in computing achievement under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.
(ii) 40 percent of total advances to micro and 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.
(iii) 20 per cent of total advances to micro and small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 lakh and upto Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs.2 lakh and up to Rs. 10 lakh.
No specific target. Forms part of total priority sector target.
Export credit is not a separate category. Export credit to eligible activities under agriculture and MSE will be reckoned for priority sector lending under respective categories.
No specific target. Forms part of total priority sector target.
Advances to weaker sections
10 per cent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.
No specific target in the total priority sector target.
Declaration of Dividend
The Reserve Bank has revised the criteria for primary
urban co-operative banks (UCBs) declaring dividend without
prior permission. Accordingly, UCBs may, henceforth, declare
dividend subject to compliance with the following parameters:
Capital to risk-weighted assets ratio (CRAR) norms as
prescribed by the Reserve Bank should be complied with.
Net non-performing assets (NPAs) should be less than 5
per cent after making all necessary provisions (including
provisions required as per assessment made by the
Reserve Bank in the last inspection report).
There is no default in cash reserve ratio (CRR)/statutory
liquidity reserve (SLR) during the year for which dividend
All required provisions should be made for NPAs,
investments and other assets as per prudential norms.
The dividend is paid out of the net profit and after making
all statutory and other provisions and adjustment for
accumulated losses in full.
UCBs complying with all the above parameters except net
NPA, and desirous of declaring dividend may approach the
respective regional office of the Reserve Bank for permission for
declaring dividend provided the net NPA is less than 10 per cent.
Home Loans-Levy of Fore-closure Charges
The Reserve Bank has advised that from June 26, 2012
UCBs should not charge foreclosure charges/pre-payment
penalties on home loans on floating interest rate basis.
The Committee on Customer Service in Banks (Chairman:
Shri M. Damodaran) had observed that foreclosure charges
levied by banks on prepayment of home loans are resented
upon by home loan borrowers across the board especially
since banks were found to be hesitant in passing on the
benefits of lower interest rates to the existing borrowers in a
falling interest rate scenario.
Rebooking of Forward Contracts
The Reserve Bank has advised that forward contract(s),
booked by residents to hedge capital account transactions for
tenor greater than one year, if cancelled with one AD Category
I bank can be rebooked with another AD Category I bank,
subject to the conditions that -
the switch is warranted by competitive rates on offer,
termination of banking relationship with the AD category I
bank with whom the contract was originally booked;
the cancellation and rebooking are done simultaneously on
the maturity date of the contract; and
the responsibility of ensuring that the original contract has
been cancelled rests with the AD category I bank which
undertakes rebooking of the contract.
The above flexibility in rollover of contracts by switching AD
category banks on the maturity date of the contract, has been
extended to all hedge transactions undertaken by residents.
Buyback/Prepayment of FCCBs
The Reserve Bank has advised that it will consider
proposals from Indian companies for buyback of foreign
currency convertible bonds (FCCBs) under the approval route
subject to the conditions that -
The buyback value of the FCCBs should be at a minimum
discount of five per cent on the accreted value.
In case the Indian company is planning to raise a foreign
currency borrowing for buyback of the FCCBs, all FEMA rules/
regulations relating to foreign currency borrowing should be
All other terms and conditions as stipulated in A.P. (DIR
Series) Circular No. 39 dated December 8, 2008 will continue
to be applicable.
This facility has come into force from July 5, 2012 and the
entire process of buyback should be completed by March 31,
2013 after which the scheme lapses.
On completion of the buyback, a report giving details of
buyback, such as, the outstanding amount of FCCBs, accreted
value of FCCBs bought back, rate at which FCCBs bought back,
amount involved, and source/s of funds should be submitted to
the Reserve Bank through the designated AD category - I bank.
ECBs – Repayment of Rupee Loans
It has been decided to allow Indian companies to avail of
external commercial borrowings (ECBs) for repayment of rupee
loan(s) availed of from the domestic banking system and/or for
fresh rupee capital expenditure, under the approval route, subject to the conditions that -
only companies in the manufacturing and infrastructure sector
will be eligible to avail of such ECBs;
such companies should consistently earn foreign exchange
during the past three financial years;
such companies are not in the Reserve Bank’s default/caution
such ECBs should only be utilised for repayment of rupee
loan(s) availed of for 'capital expenditure' incurred earlier and
are still outstanding in the books of the domestic banking
system and/or for fresh rupee capital expenditure.
The overall ceiling for such ECBs shall be USD 10 billion.
The maximum permissible ECB that can be availed of by an
individual company will be limited to 50 per cent of the average
annual export earnings realised during the past three financial
years. Companies will be allowed to avail of ECBs based on
their foreign exchange earnings and their ability to service the
ECB. Companies should draw down the entire facility within a
month after taking the loan registration number (LRN) from the
Companies desirous of availing of such ECBs should
submit their applications through their designated authorised
dealer bank with certification from the statutory auditor regarding
the utilisation of rupee loan(s) with respect to 'capital
expenditure' incurred earlier. The statutory auditor should also
certify that the company is a consistent foreign exchange earner
during the past three financial years. The outstanding rupee
loan(s) should be duly certified by the domestic lending bank(s)
concerned and the designated authorised dealer bank. The AD
should ensure that the foreign exchange for repayment of ECB
is not accessed from Indian markets and the liability arising out
of the ECB is extinguished only out of the foreign exchange
earnings of the borrowing company. The designated AD -
category I bank should monitor the end-use of funds. Bank(s)
in India will not be permitted to provide any form of guarantee(s).
RBI awarded the 2012 Dufrenoy Prize
The Reserve Bank has been awarded the 2012
Dufrenoy Prize for its precautionary approach to the
regulation of derivatives market, thus facilitating Financial
Innovation in a responsible manner. Shri G Padmanabhan,
Executive Director, and Smt. Shyamala Gopinath, former
Deputy Governor, Reserve Bank of India received the award
in a ceremony held in Paris on June 18, 2012.
The Dufrenoy Prize for Responsible Innovation is an
annual award instituted by Observatory for Responsible
Innovation. The Observatory – a MINES ParisTech Chair and
an international independent think tank - has been created with the purpose of thinking and debating new measures,
concepts and methods to foster responsibility in innovation.
The MINES ParisTech was set up in 1783, and has two
Nobel Prize winners among its alumni in the last 25 years,
apart from other eminent national and international
personalities. Nominations for the Dufrenoy award were
invited through the Observatory web-site. A jury of
international regulators, former professionals of the financial
services industry, academics at the London School of
Economics and MINES ParisTech decided to bestow the
award for 2012 to the Reserve Bank of India for its
outstanding approach towards financial regulation.
Foreign Investment in India
Investment in Government Securities
The existing limit for investment by Securities and
Exchange Board of India (SEBI) registered foreign institutional
investors (FIIs) in government securities (G-Secs) has been
enhanced by a further amount of USD 5 billion. This would take
the overall limit for FII investment in G-Secs from USD 15 billion
to USD 20 billion. In order to broad base the non-resident
investor base for G-Secs, it has also been decided to allow long
term investors like sovereign wealth funds (SWFs), multilateral
agencies, endowment funds, insurance funds, pension funds
and foreign central banks to be registered with SEBI, to also
invest in G-Secs for the entire limit of USD 20 billion. The sublimit
of USD 10 billion (existing USD 5 billion with residual
maturity of 5 years and additional limit of USD 5 billion) would have the residual maturity of three years.
The terms and conditions for the scheme for FII
investment in infrastructure debt and the scheme for nonresident
investment in infrastructure development funds (IDFs)
have been further rationalised in terms of lock-in period and
residual maturity as indicated below:
the lock-in period for investments under this limit has been
uniformly reduced to one year; and
the residual maturity of the instrument at the time of first
purchase by an FII/eligible IDF investor would be at least
Qualified foreign investors (QFIs) can now invest in those
mutual fund (MF) schemes that hold at least 25 per cent of their
assets (either in debt or in equity or both) in infrastructure sector
under the current USD 3 billion sub-limit for investment in MFs
related to infrastructure.
Disabling Cash Retraction Facility in ATMs
During the past one year, banks had reported several
instances of fraud pertaining to cash retraction. The modus
operandi is to forcibly hold on to a few pieces of notes in ATM
machines that have cash retraction system, while allowing one
or two pieces of notes to be retracted and then claiming nonreceipt
of cash. Since retracted transactions are credited back
to the customer’s account, the balance in the fraudster’s
account remains unaffected even after collecting bulk of the
delivered cash. Presently, ATMs do not have thecapability to
count the pieces of retracted notes.
This matter was discussed at a special meeting of the
National Financial Switch Steering Committee. One of the
possible solutions suggested at the meeting was to disable
the cash retraction facility in ATMs. The Reserve Bank has
accepted this suggestion and has granted approval for
disabling cash retraction facility in ATMs.
Banks have also been advised to -
educate the customer on the consequences of cash retraction
and the reasons for disabling this facility;
display information regarding disabling cash transaction at
each and every ATM location and ensure wide propagation.
The message should be flashed on the ATM machine before
the transaction is conducted;
draw a time plan by identifying the fraud prone areas to start
with and complete the activity within the timeframe; and
ensure that new ATMs being installed do not provide cash
Edited and published by Alpana Killawala for the Reserve Bank of India, Department of Communication, Central Office, Shahid Bhagat Singh Marg,
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