Development Banking and Priority Sector

Priority Sector Lending

Priority Sector: Those activities, which assume national importance and have been assigned priorities for development.

Poverty   Line	:	if	Rural Area	Population less than 50,000
family income	below
Rs. 11,000
Poverty   Line	:	if	Semi-urban	Population less than 1 lakhs
family income	below		Area
Rs.11,850
			Small Farmers	Farmers holding wet lands up to 2.5
				acres or dry lands up to 5 acres.
			Marginal	Wet Land 1.25 acres / 2.5 acres dry
			Farmers	land.

NABARD established on 12^th July 1982 by merging Agriculture Refinance and Development Corporation and Agricultural Credit Department of the RBI.

Weaker Section: All those living below the poverty line of rupees 11,000 in rural areas and Rs.11, 850 in Urban Areas and the semi-urban and deprived class of society like SC/ST.

Targets under Priority Sector Lending (8)

	Priority	Agri	SSI	Weaker
	Sector			Section
Commercial Banks & RRB	40	18		10
Foreign Banks(Any shortfall in the priority	32		12
sector targets should be placed with SIDBI)
Urban Co-operative Banks	60

Differential Rate of Interest

SLRS

Rural Artisans

SC/STs

Small/marginal Farmers

Land less labourers

The Priority sector has been classified as

.

Primary Sector: This constitutes agriculture and allied activities - dairy farming, poultry farming, goat rearing, pisciculture etc. Agriculture sector brings 1/3^rd income of the national income. Agriculture advances are classified as

Direct Agricultural Advances	Indirect Agricultural advances
The  advances  given  directly  to  the	The  advances  given  to  dealers  of
farmers  (Crop  Loan,  dairy  loan,	fertilizers, seeds , pesticides etc
Tractor loan)	PACS
	LAMPS
	Deposit made in RIDF
	Subscription   of   bonds   issued   by
	NABARD

Secondary Sector: Small sector Industries, Ancillary Industries, Village and Cottage Industries, tiny industries, and small scale service and business enterprises

SSI means industrial unit engaged in manufacturing, processing, preservation of goods, mining or servicing/repairing and whose original cost in Plant and Machinery does not exceed 1 Crore.

Ancillary Industry – Investment in Fixed asset not more than 3 Crores Tiny Industry – Investment in Plant and Machinery not exceeding 25 Lakhs. Village & Cottage Industry – total credit requirement does not exceed Rs. 50,000.

SSSBE – Investment in fixed asset excluding land and building of not more than Rs. 5 Lakhs.

Tertiary Sector: In this sector are small road and water supply operator, professional and self employed, retrial trade, small business, education, housing and state sponsored corporations for SC/ST.

Small Road and water transport operator

Small Business / Business Enterprises

Retail Traders

Professional and Self-employed

1	Small	Road   and	Vehicle not exceeding 10
	Water	Transport	There is no limit for loan amount
	operator		Repayment period should not exceed 5 years.
2	Small	Business/	Cost of equipment should not exceed 10 Lakhs.
	Business		Working Capital limit Rs, 5 Lakhs or less
	Enterprise		Loan may be given for acquiring / repairing business
			premises, to purchase of machinery, equipments,
			land, building, furniture etc.
			Loan  for  running  STD/ISD/PCO,  Travel  agency,

					mutton shop, fruit vendors etc.
3	Retail Traders			Retail traders dealing in non-essential commodities
					loan amount is fixed Rs. 2 Lakhs.
				There is no ceiling for retail traders dealing with
					essential commodities (Sugar, Kerosene etc.)
4	Professional	and		The borrowing max limit Rs. 5 lakhs. Out of which
	Self-employed				working capital limit Rs. 1 lakhs.
				For medical practitioners setting up practice in rural /
					Semi-urban areas the limit is Rs. 10 lakhs out of
					which working capital Rs. 2 lakhs.
5	Educational Loans			Education in India – Rs. 5 lakh – 7.5 lakhs
				Education abroad - Rs. 10 lakh – 15 lakhs.
6	Housing			Direct  advance  –  Rs.  15  lakhs,  Loans  upto  Rs.
					50,000 for repairs
				Indirect advance – Rs. 5 lakhs.
7	Consumption			General Consumption/Funerals		- 150
	Loans			Birth/Religious ceremonies		- 150
				Educational Needs		- 200
				Marriage expenses/Medical expenses		- 500
				The aggregate amount per family per year should
					not exceed Rs.1000[Rs.2000 against securities

Agriculture (9)

Direct Finance

Short Term Loans

Medium and Long Term Loans

Indirect Finance

Banker – Customer Relationship

Indemnifier (Customer) and Indemnified (Bank)

A contract which one promises to other from loss caused to him by the conduct of the promisor himself or the conduct of any person is called a contract of Indemnity. (Section 124: Indian Contract Act 1872)

Merchant Banking (178): Merchant Bankers are financial intermediaries. They act as intermediaries of transfer of capital from those who own it (Investor or Bond Subscriber) to those who use it (Corporate or Govts)

Lease Financing (179): This means leasing out the capital purchase of assets (to another company against monthly rents for assets) consumption or use.

Advantages to Lessee			Disadvantages to Lessee
Use  of  asset  without  incurring  the			Ownership  of  the  asset  is  with  the
capital  cost  thus  saving  on  cost			Lessor and not Lessee.
benefit of capital use.			Since Lessor imposes usage terms and
As lease rentals are permitted as a			conditions  on  assets,  asset  is
permitted	business	revenue	permitted  to  be  used  for  agreed
expense they lead to depression in			business purposes only; this takes
profits and ultimately less taxation			away the leverage from Lessee for
on profits.			utilizing  the  asset  for  alternative
Since  there  is  no  capital  cost,  this			business purposes if any.
does not impact the liability side of			Possibility of Lessor Owner becoming
the balance sheet too.			insolvent or going into liquidation;
Creditworthiness  of  the  Lessee  is			thus asset may be attached by the
intact  if  Lessee  approaches  a			creditor’s official liquidator.
financial institution for other credit			Confiscation/Repossession of asset by
related facilities			Lessor  on  breach  of  terms  and
			conditions of use of asset.

Bill Factoring (180): Factoring is an arrangement between a Factor usually a bank/NBFC/bank subsidiary and his client which includes at least 2 of the following services to be provided by the factor:

Finance/Maintenance of Accounts

Collection of Debts

Protection against credit risk.

Bill Finance	Bill Factoring
Provides finance to the entrepreneur	Ideal tool for growth and development
	of expanding SMESs
Advances  are  given  against  Bill  of	There is an outright purchase of trade
exchange	debts after providing for returns.

.

Registration of charge under section	The factor is the owner of trade debt
125 is mandatory.	and no registration is payable
It is individual transaction oriented	Bulk  finance  against  several  unpaid
	trade generated invoices.
Bill  financed  are  on  Balance  Sheet	Factoring is an off-balance sheet as the
items and are listed in Current assets	client company completes the double
in Balance Sheet	entry accounting by crediting the factor
	for the consideration value.
Advantages of Factoring	Disadvantages of Factoring
The client need not undertaken any	It may result in over-aggressiveness in
responsibility of collecting the dues	the behaviour of the client resulting
from the buyer thus saving cost on	in over trading or mismanagement.
various  fronts  like maintaining of	Possible fraudulent act in furnishing the
sales ledger/supervision etc.	Invoice
Discounted value up to 80% to 85% is	Companies  having  large  number  of
available to client on the basis of	debtors for small amounts
invoices  and  balance  is  paid  on
realization of receivables
Providing  expert  credit  an  other
business related advise to clients

Returns, Inspections, Winding Up

 CAMEL Model

·         Capital Adequacy

·         Asset Quality

·         Management

·         Earning appraisal

·         Liquidity and

·         Systems and Controls

OSMOS – Off-site Monitoring and Surveillance

RBI ensures that banks operate within set norms by conducting on-site inspections and off-site monitoring.

On-site inspection is followed by Supervisory Letter

Quarterly on-site visits are undertaken in respect of newly licensed banks during first year.

Frequency of First Tranche Returns(March 1996) is monthly / quarterly / half-yearly.

Second Tranche of OSMOS returns cover Liquidity and Interest rate exposures were introduced in July 1999

Under Section 37 of the BR Act, a moratorium order can be issued by the High Court for a maximum total period of Six Months.

When a banking company is placed under moratorium under Section 45 of BR Act, the RBI must prepare a scheme for reconstruction of the company or amalgamation with any other bank.

An order for winding up a banking company can be issued by The High Court.

Regulation and Control on Deployment of Funds (144)

Regulation and Control on Deployment of Funds (144)

·         The Present CRR and SLR requirement are 3% and 25% respectively.

·         New prudential Accounting Norms cover Capital Adequacy, Income Recognition, Asset Classification and Provisioning

Capital Adequacy

Income Recognition and Asset Classification / Provisioning

·         No income can be taken to Profit and Loss account if the interest / installment in a borrower account remains unpaid for a period of more than two quarters from the ‘past due’ date. The account has to be designated as NPA.

·         Banks are required to classify accounts according to its performing or non-performing. While interest on performing assets can be taken to P & L, interest on NPA cannot be taken to P & L

·         Banks has to make provisions for NPA.  Longer the NPA, higher the

provisioning.

Deregulation of Interest Rates

Post-Reforms Regulation of Banks

On-site Inspections and Off-Site Surveillance

Asset – Liability Management

Prudential Regulatory Measures

An advance is required to be classified as NPA if it is interest / installment is not received for 90 days.

Reserve bank has also laid down Prudential Exposure Limits under which a bank cannot lend in excess of 15% of its paid-up capital and free reserves to a single borrower and 40% to a group of borrowers.

The first Tranche of OSMOS returns

DSB1	Monthly report on Asset Liability and Off Balance Sheet Exposures
DSB2	Quarterly report on Capital Adequacy
DSB3	Quarterly Operating Results
DSB4	Monthly report on Asset Quality
DSB5	Quarterly Report on Large Credits
DSB6	Quarterly Report on Connected Lending
DSB7	Half-Yearly Report on ownership and Control

The Second Tranche of OSMOS returns
DSB 8	Monthly Return on Structural Liquidity
DSB 9	Monthly Report on Interest Rate Sensitivity
DSB 10	Monthly Report on Sensitivity to Interest Rates – Forex
DSB 11	Monthly Report on Maturity and Positio
DSB 12	Quarterly  Report on  Operations  of  subsidiaries,  Associates,  Joint
	Ventures