The Reserve Bank of India (RBI) has given new generation private-sector banks a breather of two to three years to meet their priority-sector lending target of 40 per cent. Further, the central bank has also exhorted private banks to shore up their priority-sector lending by doing so directly, less through investments in the bond offerings of the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) or by parking the shortfall in rural infrastructure development fund (RIDF).

Sources said that the decision followed a meeting that representatives of private banks had with the RBI at which these banks -- old and new -- were asked not only to shore up such lending’s, but a few -- the newer ones -- were also given additional time of two to three years to reach the target. The new generation private banks made presentations to the effect that given their recent vintage, it might take them time to achieve the priority-sector lending targets, as they do not have a network of branches in rural areas. Some of these banks are close to achieving the 40 per cent target, but most of the banks have a lot of ground to cover before they reach the mark.

Priority-sector advances of most of these banks are hovering around the 25 per cent to 30 per cent mark though a few are close to 40 per cent. It has been gathered that 30 per cent would be the median-target to be achieved by the private-sector banks for the moment. One or two of the older south-based private sector banks have achieved the target. Officials in the newer private sector banks admit that there is an appreciable gap between the target and their current levels.
Said a top official at a private-sector bank: "The step to increase direct lending to the priority sector is a slightly regressive step. There are more pragmatic ways of doing the same. Priority-sector lending is an area where we have no expertise or no rural branches for that matter. We will have to hire people with skills in credit-assessment and other areas as we do not know the sector". Banks have to lend 40 per cent of their total advances to the priority-sector. Such lending does include sub-segments like agriculture, small-scale industries, transport operators and education. They can do so either by lending directly or by proxy. Private-sector banks are more compliant in the latter sense, but the RBI now wants them to do so more by way of direct lending.