Banks seek flexibility in agriculture loans

Banks have sought flexibility (fungibility) in direct and indirect lending to agriculture and allied sectors to increase financial assistance to corporates, which are entering rural markets, reports Business Standard. 
 
The business model in agriculture is changing with many corporates entering the rural market. 
 
So long as such activities by corporates result in better infrastructure, employment generation and better price to farmers, lending by banks to such corporates should be treated as part of direct agricultural lending, the Indian Banks' Association (IBA) has said in a memorandum to the Reserve Bank of India (RBI). 
 
"Rural forays by big corporates will help to improve trade terms for the farmers," a senior public sector bank official said. 
 
Indian banks have been set a priority sector lending sub-target of 18 per cent of the net bank credit (NBC) to agriculture within the overall priority sector target of 40 per cent. 
 
The draft guidelines state that indirect lending in excess of 4.5 per cent of the adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher, will not be reckoned for computing performance under the 18 per cent sub-target for agriculture. 
 
At present, the direct finance to agriculture includes short-, medium- and long- term loans to individual farmers and self help groups without limit. 
 
The loans to corporates, partnership firms and institutions up to Rs 20 lakh for taking up agriculture and allied activities are also considered as part of direct lending, according to the RBI draft guidelines. 
 
However, lending in excess of Rs 20 lakh to corporates, institutions for farming and allied activities will be treated as indirect finance. As such, this cap of Rs 20 lakh should be reviewed, the IBA said. 
 
Else, the RBI should allow banks fungibility between direct and indirect farm lending within the overall ceiling of 18 per cent, regardless of the quantum of finance for such activities, it said. 
 
On the revised formula for computing priority sector lending, the IBA said linking priority sector lending to the adjusted net bank credit is likely to have an adverse impact on most of the banks. 
 
Particularly, the computing of credit equivalent of off-balance sheet exposures and deduction of NRIs deposits (FCNRNRNR deposits) will seriously affect foreign banks, according to the IBA. 
 
Also including the investments in non-SLR bonds in held to maturity category in computing lending obligations would affect most banks, more due to illiquid nature of such bonds. 
 
The revised formulae for computing priority sector lending obligations may create limitations in meeting priority sector norms especially when new initiatives to activate corporate bond market to fund infrastructure projects are in the offing.