RBI Flags Priority Sector Lending Lapses, Asks HDFC Bank And ICICI Bank To Make Extra Provisions

The Reserve Bank of India (RBI) has advised HDFC Bank and ICICI Bank to maintain extra reserves based on the identification of discrepancies in their classification of loans in priority sector lending. The directions were issued following the central bank’s annual supervisory review, which assesses compliance with regulatory norms, including priority sector targets and reporting accuracy.

Under current rules, banks must lend 40 per cent of their adjusted net bank credit to priority sectors, in which 18 per cent of this allotment targets agriculture. Shortfalls incur penalties or appropriate actions.

Extent of Misclassifications

RBI has found that in the case of ICICI Bank, there were some agricultural loans which were classified under priority sector loans but did not strictly meet the requirements in terms of eligibility. According to the review, loans worth approximately Rs 20,000-25,000 crore of such loans either exceeded the 'scale of finance' requirements or were not fully documented.

The scale of finance sets crop-wise and land holding-wise ceilings on the amount of credit that can be classified as agricultural lending. Amounts above this are to be considered as non-priority sector lending.

The classification problems found in the case of HDFC Bank were similar to those of ICICI, although the amounts were lower than in the latter.

Provisioning Orders and Quantity

Based on these findings, RBI asked ICICI Bank to make one further provision of Rs 1,283 crore. HDFC Bank was asked to create provisions of Rs 500 crore.

These are supervisory charges and are not associated with defaults in loans or deterioration in asset quality. The central bank has clarified that the underlying loans are still being serviced and are not non-performing assets (NPAs).

Impact of Financial Results

The additional provisioning will directly affect the banks’ profitability for the quarter in which the charges are recognised. For ICICI Bank, the Rs 1,283 crore provision represents a hit to earnings, while HDFC Bank will see a Rs 500 crore impact.

However, because this is a one-time provision, this will neither affect their long-term capital adequacy nor lending strategies, nor will it affect their targets in priority sectors in future periods after the issues relating to classification have been resolved.

Corrective Actions Taken by the Banks

Both banks have accepted the findings made by the RBI and have stated that corrective steps are being taken. These include tightening internal controls, improving documentation standards, and ensuring agricultural loans remain within prescribed limits to qualify as priority sector lending. Banks are also expected to revise internal audit and compliance processes to prevent similar misclassifications in future.