RBI creates sub-targets for foreign banks to lend to farmers, MSMEs

Separate IRF limit for foreign investors

The Reserve Bank of India (RBI) has directed foreign banks with more than 20 branches to mandatorily create sub-targets to lend a portion of their loan books to small and marginal farmers, as well as micro enterprises.

Banks, including Standard Chartered, Citibank and HSBC, have more than 20 branches in India. Foreign banks in India will have to eventually lend 40 per cent of their total loan book to the priority sector by 2020.

Banks have been complaining against this mandate, but the creation of a sub-target is likely to put them off even more.

In a notification on its website, RBI said a sub-target of 8 per cent of net bank credit, or credit equivalent amount of off-balance sheet exposure, whichever is higher, “shall become applicable for foreign banks with 20 branches and above, for lending to small and marginal farmers from FY 2018-19.”

Another sub-target of 7.50 per cent, using the same criterion, would be levied to these banks from 2018-19 for lending to micro enterprises.

However, in a partial relief, the RBI on Thursday removed the prior condition that only loans of up to ~50 and ~100 million given to micro and small and medium enterprises (MSMEs) would be considered for priority sector loans. The Reserve Bank of India (RBI) on Thursday created a separate ~50 billion limit for foreign investors in the interest rate futures (IRF) segment.

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All bank loans to MSMEs will now “qualify under priority sector without any credit cap,” the RBI said in a notification on its website.

To meet their priority sector targets, foreign banks often bought loans from microfinance and other NBFCs since by nature, foreign banks are to take position in IRFs.

“To facilitate further market development and ensure that access of FPIs to IRFs remains uninterrupted, it has been decided to allocate FPIs a separate limit of ~50 billion for long position in IRFs,” RBI said in a notification on its website. “The limits prescribed for investment by FPIs in G-secs (currently ~3.015 trillion) will be exclusively available for investment in G-secs,” it added. not good at giving small value commercial loans. Besides, they also don’t have the reach in rural areas where these loans are needed. Now with the removal of such a cap, banks can breathe a sigh of relief since in most years, they fail to meet their priority sector loan targets.