Directed Lending
The RBI requires banks to deploy a certain minimum amount of their credit in certain identified sectors of the economy. This is called directed lending. Such directed lending comprises priority sector lending and export credit Priority sector lending
Priority sector lending
The objective of priority sector lending program is to ensure that adequate credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability. These sectors include agriculture, small scale enterprises, retail trade, etc. Small housing loans, loans to individuals for pursuing education, loans to weaker sections of the society etc also qualify as priority sector loans. To ensure banks channelize a part of their credit to these sectors, the RBI has set guidelines defining targets for lending to priority sector as whole and in certain cases, sub-targets for lending to individual priority sectorsThe RBI guidelines require banks to lend at least 40% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure (CEOBSE), whichever is higher. In case of foreign banks, the target for priority sector advances is 32% of ANBC or CEOBSE,whichever is higher.
In addition to these limits for overall priority sector lending, the RBI sets sub-limits for certain sub-sectors within the priority sector such as agriculture. Banks are required to comply with the priority sector lending requirements at the end of each financial year. A bank having shortfall in lending to priority sector lending target or sub-target shall be required to make contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD or funds with other financial institutions as specified by the RBI.
Export Credit
As part of directed lending, RBI requires banks to make loans to exporters at concessional rates of interest. Export credit is provided for pre-shipment and post-shipment requirements of exporter borrowers in rupees and foreign currencies. At the end of any fiscal year, 12.0% of a bank's credit is required to be in the form of export credit. This requirement is in addition to the priority sector lending requirement but credits extended to exporters that are small scale industries or small businesses may also meet part of the priority sector lending requirement
