Bank of baroda

Directed Lending
Priority Sector Lending
The RBI requires commercial banks to lend a certain percentage of their net bank credit to specific sectors (known as
priority sectors), such as agriculture, small-scale industry, small businesses and housing finance. Total priority sector
advances should be 40.0% of net bank credit with agricultural advances required to be 18.0% of net bank credit and
advances to weaker sections required to be 10.0% of net bank credit, and 1.0% of the previous year’s net bank credit
required to be lent under the Differential Rate of Interest scheme. Domestic scheduled commercial banks having shortfall
in lending to priority sector are allocated amounts for contribution to the Rural Infrastructure Development Fund established
in National Board for Agricultural and Rural Development. Any shortfall by foreign banks in the amount required to be
lent to the priority sectors may be required to be deposited with the Small Industries Development Bank of India.
The RBI requires banks to make advances towards housing finance. This can be in the form of home loans to individuals
or subscription to the debentures and bonds of the National Housing Bank and housing development institutions recognised
by the Government of India.
The RBI also periodically issues instructions/directives to banks with regard to providing credit facilities to minority
communities.
Export Credit
The RBI also requires commercial banks to make loans to exporters at concessional rates of interest. This enables
exporters to have access to an internationally competitive financing option. Pursuant to existing guidelines, 12.0% of a
bank’s net bank credit is required to be in the form of export credit. We provide export credit for pre-shipment and post-
shipment requirements of exporter borrowers in rupees and foreign currencies.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of concentration of credit risk, the RBI has
prescribed credit exposure limits for banks and long-term lending institutions in respect of their lending to individual
borrowers and to all companies in a single group (or sponsor group).
The limits set by the RBI are as follows:
Credit exposure ceiling for a single borrower shall not exceed 15.0% of capital funds. Group exposure limit is
40.0% of capital funds. In case of financing for infrastructure projects, the single borrower exposure limit is extendable
by another 5.0%, i.e. up to 20.0% of capital funds and the group exposure limit is extendable by another 10.0%, i.e.
up to 50.0% of capital funds. Capital funds are the total capital as defined under capital adequacy standards (Tier
I and Tier II capital).
A bank may, in exceptional circumstances, with the approval of its board of directors, consider enhancement of the
exposure over the above specified limits, up to a further 5% of capital funds. Bank has decided that such enhancement
may be considered for public sector undertaking borrowers based on their cash flows, and for non-public sector
undertaking borrowers if they have a risk rating of ‘AA’ and above.
Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including
underwriting and other similar commitments) as well as certain types of investments in companies. The sanctioned
limits or outstandings, whichever are higher, are considered for arriving at the exposure limit. Non-fund exposures
are to be reckoned at 100% of the limit or outstandings, whichever is higher.

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Credit exposure is the aggregate of:
all types of funded and non-funded credit limits;
facilities extended by way of equipment leasing, hire purchase finance and factoring services;
advances against shares, debentures, bonds and units of mutual funds to stock brokers and market makers;
bank loan for financing promoters’ contributions;
bridge loans against equity flows/issues; and
financing of initial public offerings.
Investment exposure comprises of the following elements:
investments in shares and debentures of companies acquired through direct subscription, devolvement arising out
of underwriting obligations or purchase from secondary markets or on conversion of debt into equity;
investment in public sector undertaking bonds through direct subscription, devolvement arising out of underwriting
obligations or purchase made in the secondary market;
investments in commercial papers issued by corporate bodies or public sector undertakings; and
investments in debentures, bonds, security receipts, pass through certificates issued by a securitisation or
reconstruction company. However, initially, since only a few securitisation and reconstruction companies are being
set up, banks will be allowed to exceed prudential exposure on account of such investments on a case-to-case
basis.
To ensure that exposures are evenly distributed, the RBI requires banks to fix internal limits of exposure to specific
sectors. These limits are subject to periodic review by the banks.