Banks' contingencies liabilities and off-balance sheet items should not be considered as part of priority sector lending, the Reserve Bank of India (RBI) said on Friday.

Banks are required to lend 40 per cent of their total loans or adjusted net bank credit (ANBC) to the priority sector, which includes agriculture, exports, small manufacturing units and other weaker sections of the economy.

The central bank said, "Banks are advised to declassify such accounts with retrospective effect, where a contingent liability/off-balance sheet item is treated as a part of priority sector target achievement."

The list of off-balance sheet items includes derivative instruments (currency hedging), letter of credit (LC), and bank guarantee (BG).

The central bank clarified that including contingent liabilities and off-balance-sheet items while calculating the loans target for priority sector was not in conformity with its priority sector lending guidelines. However, the apex bank did not disclose the names of any banks violating the norm.

The banks that fail to attain priority sector lending targets have to invest in Nabard or bonds of Rural Infrastructure Development Fund (RIDF) for the shortfall. These bonds carry a very low rate of interest, normally in the range of 3-6 per cent.