Banks seek priority sector tag for loans to affordable home builders | Business Line

Banks seek priority sector tag for loans to affordable home builders | Business Line

Online comments posted on July 21, 2013:

Last month it was reported that Textiles Ministry (GOI) was proposing ‘priority sector tag’ for textiles industry anticipating a drastic reduction in cost of credit on change in classification. The report said, ‘Once the demand is met, the industry will be able to avail itself of bank loans at seven per cent compared to 12-14 per cent it pays currently’. In the present scenario, it is doubtful that priority status by itself will fetch such benefit. That apart, the purpose of directed lending under priority sector goes beyond provision of ‘cheap’ funds and has more to do with allocation of bank credit to sectors which banks avoid from a commercial perspective due to several reasons including risk perception or increased transaction costs.

If textile industry or housing sector faces viability threat on account of rising costs, the problem should be addressed after identifying the factors responsible for such a situation. A substantial reduction in interest costs by ‘stroke of a pen’ will only transfer the burden to banks or bring down the credit flow to other sectors. The recent discussions in the media gives an impression that ‘priority sector status’ is a different animal for GOI, RBI, banks and borrowers.


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