RBI comes up with stricter norms for Priority Sector Lending

It has been brought to the notice of the Reserve Bank that certain scheduled commercial banks are extending short-term loans of tenure ranging from six months to one year to Housing Finance Companies (HFCs), and classifying the same as priority sector advances.

Since housing loans are generally medium to long-term loans taken by the individuals, the short-term loans granted by banks to HFCs for would not be considered as loans taken by individuals. These loans are considered to be ineligible as Priority Sector Lending.

The banks should now ensure that the end use of the funds strictly as per the guidelines on lending to priority sector.

This means that loans which are mid-term loans can be regarded under Priority Sector Lending. This Lending constitutes a loan amount of less than Rs 20 lakh. The total amount that is eligible for priority sector lending is restricted to five per cent of a bank’s total priority sector lending on an ongoing basis.

This special dispensation is applicable to loans granted by banks to HFCs up to March 31, 2010.

Banks have to lend 40 per cent of their lending to areas like farm sector, small and medium sector, and weaker sections among others, which are collectively called priority sector.