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IRJC

International Journal of Marketing, Financial Services & Management Research

Vol.1 Issue 7, July 2012, ISSN 2277 3622

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PRIORITY SECTOR LENDINGS BY COMMERCIAL BANKS IN INDIA

DR. SANDEEP KAUR*

*Department of Economics,

Punjabi University Patiala.

ABSTRACT

After independence it was felt that in order to achieve overall development of the country it is

essential to develop the large rural sector, for which it is necessary to channelise required

financial resources. An enunciation of the need to channelise the flow of credit to certain sectors

of the economy, known as the priority sectors, in the largest interest of the country, can be traced

to the Reserve Bank‟s credit policy for the year 1967-1968. The government initiated measures

for social control over banks in 1967-1968 with a view to securing a better adaptation of the

banking system to the needs of economic planning and it is playing a more active role in aiding

sectors like agriculture and small industries. The present study is an attempt to study the priority

sector advances by the public, private sector and foreign bank groups. All the parameters have

been analyzed for the period 1997-1998 to 2008-2009. The study concludes that public and

private sector banks have achieved the overall target of 40 per cent. On the other hand, foreign

banks have achieved the small scale industries, export credit and overall target.

KEYWORDS: Priority sector lendings, Commercial banks, Agriculture advances, Small

enterprises.

______________________________________________________________________________

INTRODUCTION

Extension of credit to small borrowers in the hitherto neglected sector of the economy has been

one of the key tasks assigned to the public sector banks in the post-nationalisation period. At a

meeting of the National Credit Council held in July 1968, it was emphasized that commercial

banks should increase their involvement in the financing of priority sectors, viz. agriculture and

small scale industries. The description of the priority sectors was later formalized in 1972 on the

basis of the report submitted by the Informal Study Group on Statistics relating to advances to

the priority sectors constituted by the Reserve Bank of India in May 1971. On the basis of this

report, the Reserve Bank prescribed a modified return for reporting priority sector advances and

certain guidelines were issued in this connection indicating the scope of the items to be included

under the various categories of priority sector. Although initially there was no specific target

fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the

share of these sectors in their aggregate advances to the level of 33.33 per cent by March 1979.

At a meeting of the Union Finance Minister with the Chief Executive Officers of public

sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of

their advances to priority sector to 40 per cent by March 1985. Subsequently, on the basis of the

recommendations of the Working Group on the Modalities of Implementation of Priority Sector

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Lending and the 20-Point Economic Programme by banks (Chairman : Dr. K.S. Krishnaswamy),

all commercial banks were advised to achieve the target of priority sector lending at 40 per cent

of aggregate bank advances by 1985. After this the priority sector advances has undergone

several changes, since then, several new areas and sectors has being brought within the purview

of this sector. A need has therefore, been felt to review the concept and the segments of priority

sector. Consequently, in paragraph 89 of the annual policy Statement of Reserve Bank of India

for the year 2005-2006, it was stated that prescriptions relating to priority sector lending have

been modified from time to time and generally, the eligibility criteria have been enlarged to

include several new areas. On the basis of this recommendation an Internal Working Group

(Chairman: Shri C.S. Murthy) was set up in the Reserve Bank to examine the need for

continuance of priority sector lending prescriptions, review the existing policy on priority sector

lending, including the segments constituting the priority sector targets and sub-targets and to

recommend changes, if any, required in this regard. It was decided to include only those sectors

as part of the priority sector, that impact large segments of the population, the weaker sections

and the sectors which are employment-intensive such as agriculture, and tiny and small

enterprises which came into effect from 30 April, 2007.

To ensure bank channelise a part of their credit to these sectors, the RBI has set guidelines

defining targets for lending to priority sector as whole and in certain cases, sub-targets for

lending to individual priority sectors (Table 1). In addition to these limits, also a provision has

TABLE 1: TARGETS UNDER PRIORITY SECTOR LENDING

Domestic Commercial Banks Foreign Banks

Total Priority Sector

Advances

40 per cent of ANBC or

CEOBSE


CEOBSE

Total Agricultural Advances 18 per cent of ANBC or

CEOBSE

No Target

Small Enterprise Advances No Target 10 per cent of ANBC or

CEOBSE

Export Credit Export Credit is not a part of

priority sector for domestic

commercial banks


CEOBSE

Advances to Weaker Sections 10 per cent of ANBC or

CEOBSE

No Target

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Source: Master Circular on lending to Priority Sector dated July1, 2009.

Published by RBI, Mumbai.

Note: ANBC: the Adjusted Net Bank Credit.

CEOBSE: Credit Equivalent of Off-Balance Sheet Exposure.

been made that banks which could not meet the priority sector targets can deposit funds in the

financial institutions like National Bank for Agriculture and Rural Development (NABARD)

under Rural Infrastructure Development Fund (RIDF) or some banks can do so in the Small

Industries Bank of India (SIDBI) for lesser interest rates, which in turn would be lent to the

priority sectors.

PRIORITY SECTOR LENDING BY SCHEDULED COMMERCIAL BANK

Table 2 indicates the priority sector advances by scheduled commercial banks. The priority

sector lending norms have been fulfilled by a good margin by both public and private sector

banks at present. While public sector banks, continued to meet the target till 2006, however

marginally fell short of the target of 40 per cent in March 2007. They also failed to achieve the

various sub-targets for agriculture (except 2008), tiny sector within the SSI sector, advances to

weaker sections, etc. Table also indicates an important fact that the issue of priority sector

lending, an important concern against privatization, is no longer that crucial, since in 2003 the

share of credit of private sector banks going to the priority sector had surpassed that of public

sector banks. Whereas foreign banks have achieved the overall priority sector targets and sub-

targets for export credit and nearly achieve the sub-target with respect to SSI as well. It is an

interesting fact to note that the share of export credit in total net bank credit has been

significantly above the prescribed sub-target of 12 per cent.

Looking at the percentage share of credit to the sub-groups of the priority sector, it is

observed that the credit to SSI sector of public and private sector bank groups has been declined

by 6.4 per cent and 6.9 per cent respectively over time. On the other hand, the credit to other

priority sector by public and private sector bank groups has been increased by 7.0 per cent and

12.3 per cent respectively over time. The increase in the share of priority sector credit in all bank

groups could because of the substantial increase in the housing credit, as housing credit also

forms a part of priority sector credit.

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TABLE 2: PRIORITY SECTOR LENDING BY SCHEDULED COMMERCIAL BANKS

PUBLIC SECTOR BANKS (AMOUNT IN RS. CRORE)

Item 1997

-

1998

1999

-

2000

2000

-

2001

2001

-

2002

2002

-

2003

2003

-

2004

2004

-

2005

2005

-

2006

2006

-

2007

2007

-

2008

2008

-

2009

Priority

Sector

Advances #

91319

(41.8)

104094

(39.2)

127478

(40.2)

149116

(43.7)

171185

(43.1)

203095

(42.5)

244456

(43.6)

307046

(42.8)

409748

(40.3)

521376

(39.7)

610450

(44.7)

Agriculture 34305

(15.7)

37631

(14.2)

45296

(14.3)

53571

(15.7)

63082

(15.9)

73507

(15.4)

84435

(15.1)

109917

(15.3)

155220

(15.3)

202614

(15.4)

249397

(18.3)

Micro and

Small

Enterprises*

38109

(17.5)

42591

(16.1)

46045

(14.6)

48400

(14.2)

49743

(12.5)

52988

(11.1)

58311

(10.4)

67800

(9.5)

82434

(8.1)

102550

(7.8)

151137

(11.1)

Other

Priority

Sector

18881

(8.7)

23661

(8.9)

30816

(9.7)

40791

(12.0)

53712

(13.5)

71448

(15.0)

101710

(18.1)

125114

(17.4)

163756

(16.1)

206661

(15.7)

_

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Item 1997

-

1998

1999

-

2000

2000

-

2001

2001

-

2002

2002

-

2003

2003

-

2004

2004

-

2005

2005

-

2006

2006

-

2007

2007

-

2008

2008

-

2009

Priority Sector

Advances #

11614

(40.9)

14155

(41.4)

18368

(38.0)

21550

(38.2)

25709

(40.9)

36705

(44.4)

48920

(47.3)

69886

(43.6)

106586

(42.8)

144549

(42.9)

164068

(42.5)

Agriculture 2746

(9.7)

3257

(9.5)

40230

(8.3)

5394

(8.5)

8022

(8.5)

11873

(11.2)

14730

(14.2)

21636

(13.5)

36712

(13.6)

52034

(12.7)

58566

(17.1)

Micro and

Small

Enterprises*

5848

(20.6)

6451

(18.9)

8000

(16.5)

8158

(14.4)

8613

(13.7)

6857

(8.2)

7590

(7.3)

8592

(5.4)

10421

(4.2)

13136

(3.9)

46912

(13.7)

Other Priority

Sector

3020

(10.6)

4447

(13.0)

6345

(13.0)

7998

(12.0)

9074

(14.4)

17602

(22.1)

26600

(25.7)

38797

(24.2)

57777

(23.2)

76919

(22.9)

_

Priority Sector

Advances #

6940

(34.3)

8270

(37.0)

9934

(35.2)

11572

(33.5)

13414

(34.0)

14555

(33.1)

17960

(34.1)

23843

(35.3)

30439

(34.4)

37831

(33.4)

50254

(39.5)

Export Credit 4950 8678 6459 6961 6948 8276 9760 12339 17326 20711 28954

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(24.5) (25.0) (22.9) (20.2) (18.0) (18.8) (18.5) (18.3) (19.6) (18.3) (22.7)

Micro and

Small

Enterprises

2084

(10.3)

2460

(11.0)

2990

(10.6)

3646

(10.6)

4010

(9.1)

4010

(9.1)

5307

(10.1)

6907

(10.2)

8430

(9.5)

11637

(10.3)

15489

(12.2)

Source: Report on Trend and Progress of Banking in India, Published by RBI Mumbai.

Note: 1. Figures in parentheses represent percentages to net bank credit. Since 2007-2008, these figures

represent percentage to adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure, whichever is

higher.

2. „*‟ indicates the revised guidelines on priority sector advances issued on April 30, 2007 take into account the revised definition of

small and micro enterprises as per the Micro, Small and Medium Enterprises Development Act, 2006.

3. „#‟ indicates the revised guidelines on lending to priority sector, broad categories of advances under priority sector include

agriculture, micro and small enterprises, retail trade, micro-credit, education and housing.

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CONCLUSION

Thus, it is concluded from all the tables that lending to priority sectors are higher by the

public and private sector banks than the foreign banks. Public and private sector banks have

achieved the overall target and sub-target but not as much as foreign banks. Non-achievement of

agriculture lending target by many public and private sector banks is due to low capital

formation in agriculture resulting in poor credit absorption and write-off of non-performing loans

leading to reduction in the outstanding advances in the case of some banks. Lending to priority

sector creates many problems for the Indian banks like low profitability, high NPAs, transaction

cost etc. it is a need of the hour to find out solutions for these problems otherwise progress of the

Indian banks will cease.

REFERENCES

Joshi, P.N. (2002), “Financial Sector Reforms and the Weaker Sections of the Society”, Journal

of the Indian Institute of Bankers, Vol. 73, No. 2, April-June, pp. 17-26.

Uppal, R.K. (2009), “Priority Sector Advances: Trends, Issues and Strategies”, Journal of

Accounting and Taxation, Vol. 1(5), December, pp. 079-089.

Roy, Mohua (2006), “A Review of Banking Lending to Priority and Retail Sectors”, Economic

and Political Weekly, Vol. XLI, No. 11, March 18-24, pp.1035-1040

Sen, Sunanda and Ghose, Soumya Kanti (2005), “Basel Norms, Indian Banking Sector and

Impact on Credit to SMEs and the Poor”, Economic and Political Weekly, Vol. XL, No. 12,

March 19-25, pp. 1167-1180.

STATISTICAL PUBLICATIONS

Report on Trend and Progress of Banking in India (various issues), RBI Publications, Mumbai.

Statistical Tables relating to Banks in India (various issues), RBI Publications, Mumbai.

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