What changed
RBI observed some banks were counting contingent liabilities and off-balance sheet items toward priority sector targets. The circular explicitly states this practice violates existing guidelines and mandates declassification of such accounts with retrospective effect. Additionally, it reiterates that all loans, investments, or other items eligible for priority sector classification must also be included in Adjusted Net Bank Credit.
What it means for you
Banks must immediately review their priority sector portfolios and remove any contingent liabilities or off-balance sheet items that were incorrectly counted. This will likely reduce reported priority sector achievement for some banks, potentially exposing shortfalls. The linkage to Adjusted Net Bank Credit ensures consistency in how priority sector eligibility is measured.
What you must do
- Audit your priority sector portfolio to identify any contingent liabilities or off-balance sheet items currently counted toward targets.
- Reclassify such accounts with retrospective effect and adjust your priority sector achievement figures accordingly.
- Ensure all loans, investments, and other items classified under priority sector targets are also included in Adjusted Net Bank Credit calculations.
- Update internal reporting systems to prevent future inclusion of ineligible items in priority sector computations.
Who it affects
All scheduled commercial banks (excluding Regional Rural Banks), Priority sector lending teams, Risk and compliance departments, Credit and portfolio management teams
What exactly is a contingent liability in this context?
Contingent liabilities are off-balance sheet items like guarantees, letters of credit, or undrawn loan commitments. The circular clarifies these cannot be counted toward priority sector lending targets.
Does this circular affect all priority sector sub-targets?
Yes, the clarification applies to all priority sector targets and sub-targets. Any contingent liability or off-balance sheet item treated as part of priority sector achievement must be declassified.
What is the deadline for compliance?
The circular does not specify a separate deadline; it advises immediate declassification with retrospective effect. Banks should act promptly to adjust their portfolios and reporting.