RBI has recently revised its incentive framework to push banks to increase the flow of priority sector credit to districts with lower credit flow.

New Guidelines of Priority Sector Lending

• Objective: To address the regional disparities at the district level, the new measure will encourage banks to provide small loans in economically disadvantaged districts with low average loan sizes.
  • The new norms discourage lending in districts with high average loan sizes.
• RBI maintains a district wise ranking in terms of per capita credit flow and circulates this with banks so that the lenders raise their efforts as per need to address the gap.
• These lists will remain valid until FY 2026-2027, after which it will be reviewed.

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The RBI Revised Guidelines

• The RBI has with effect from FY25, assigned a higher weight of 125% to the incremental priority sector credit in the districts with per capita priority sector credit less than Rs 9000
  • This effectively means that if a bank gives Rs 100 loan in low credit flow district, it will be considered as Rs 125 priority sector loan.
• Dis-incentive Framework: RBI also follows a disincentive framework for districts with comparatively higher flow of priority sector credit in which a lower 90% weight is assigned for districts where the per capita priority sector credit flow is greater than Rs 42,000. 
  • The weight is maintained at 100% for all other districts not mentioned by the central bank.
• Previous Provision: RBI until now followed a rule of higher weight of 125% in districts where per capita priority sector credit flow was Rs 6000 and the disincentive framework threshold was Rs 25000 earlier.

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