Banking Test 4

Priority sector lending norms prescribed by the Reserve Bank of India require all scheduled commercial banks operating in India to direct a specified proportion of their adjusted net bank credit or credit equivalent amount of off-balance-sheet exposures, whichever is higher, to certain categories of borrowers and economic activities that are considered important for inclusive economic development but may be unable to access adequate credit from the banking system on purely commercial terms without regulatory encouragement. The categories of economic activities and borrowers designated as priority sectors for this purpose include agriculture and allied activities including farm credit, agricultural infrastructure, and ancillary activities, micro, small, and medium enterprises engaged in manufacturing and services, export credit extended to eligible exporters up to a specified limit, education loans for higher studies in India and abroad, housing loans to individuals for the acquisition or construction of residential property within specified income and loan amount limits, social infrastructure projects including healthcare facilities and drinking water projects, renewable energy projects such as solar, wind, and biomass energy installations, and a residual category covering other weaker sections of society including persons with disabilities, self-help groups, distressed farmers indebted to informal moneylenders, and minority communities. Scheduled commercial banks are required to achieve an overall priority sector lending target of forty percent of adjusted net bank credit, with specific sub-targets for agriculture at eighteen percent of which eight percent must go to small and marginal farmers, and micro enterprises at seven and a half percent. Failure to achieve the mandated targets or sub-targets at the end of the financial year requires the shortfall amount to be deposited with the National Bank for Agriculture and Rural Development or the Small Industries Development Bank of India or the National Housing Bank in the form of priority sector lending certificates or other designated instruments that earn a lower return than commercial lending, creating a financial incentive for banks to actually achieve the targets through lending rather than paying the penalty. Priority sector lending certificates, introduced in April 2016, allow banks that exceed their targets in specified categories to sell the surplus certificates to banks that are deficient in those categories, creating a secondary market mechanism that improves the system-wide efficiency of achieving overall priority sector lending goals by directing resources to where lending is comparatively more feasible. The Kisan Credit Card scheme, agricultural gold loans, joint liability group lending, and self-help group bank linkage programmes are important tools used by banks to achieve their agriculture sub-targets and to extend formal credit to the large number of small and marginal farmers, tenant farmers, oral lessees, and agricultural labourers who have historically been underserved by the formal banking system.