Priority Sector Lending Policies of Commercial Banks in India


By
Praveen. P
S3 MBA
Jawaharlal Business School
Kerala
 


Abstract

Banking is supposed to be one of the important service segment which is having significant role in accelerating the economic growth of a country.  India is the country which is well known for the operational efficiency of banking and financial institutions in front of the entire world.  Indian banking has reached to the present status after passing through several decades of developments.  The two phases of nationalization of banks in 1969 and 1988 have contributed drastic changes in this scenario.

Even though banking is termed as a service sector, it is ultimately a business. Since there is a say that 'the business of business is to do the business' the central bank of our country i.e. RBI had to issue certain guides lines in respect of the lending policies of the commercial banks.  Recently we could see that some of the leading corporate giants in India were waiting for the approval of RBI to start banking business.  In this context, RBI and the Central government is keen on protecting the interest of the public.  By priority sector lending policies they mean that, out of the total fund given as loans and advances a fixed percentage should be given to some specified sectors.

INTRODUCTION

Banking is a service industry, which touches the lives of millions of people.  It is potent force that can bring about socio-economic change in the country.  Just like any other business, banking also makes use of the resources of the society and depends on the society for it's functioning.  This, in turn, sets some duties and responsibilities on banks to help enhancing the welfare of the society.  As the most powerful arm of our country's fiscal system, Indian banks are expected to play a special role in our strivings for attaining the socio-economic objectives contemplated by the constitution balanced regional development, eradication of poverty, employment generation, equality in wealth and opportunity for all to grow and develop.

PRIORITY SECTOR LENDING

Government of India identified certain sectors as priority sectors such as agriculture, artisans, village and cottage industries, Self Help Groups, SSIs, Micro enterprises, export units etc.  Banks were directed to set aside a definite portion of their credit facilities to these sectors.  Development of these sectors is expected to bring them into the mainstream of national life.  Banks and financial institutions are playing great role as government's agencies for such economic change.

Borrowers in priority sector are given preferential treatment while lending.  Interest rates are lower, security norms are relaxed, margins are concessional and period of repayment is extended in these priority advances.

Priority sector advances consists of lending broadly to the following sectors:

1. Small scale industries
2. Agriculture
3. Allied agricultural activities
4. Village and cottage industries
5. Retail trade, small business, and self-employed professionals
6. Transport operation
7. Export oriented unit
8. Micro credit
9. Housing finance
10. Organizations of SC and ST
11. Software industry
12. Venture capital
13. Food and agro processing
14. Educational loans
15. Employment generation programmes
16. Urban self employment
17. Development of women and children
18. Liberation and rehabilitation of scavengers
19. Differential rate of interest schemes.

The Narasimham Committee on Financial Reforms (1991), made recommendations to redefine the priority sector to include small and marginal farmers, tiny sector of industry, small and transport operators, village and cottage industries, rural artisans and other weaker sections.  Over the time, the definition of priority sector has been widened and the following has been included in its fold.

Micro credits are credit extended by commercial banks to the poor in rural, semi-urban and urban areas whose access to conventional credit channel is constrained by the requirement of collateral securities and high transaction cost.  Micro credits are routed through Self Help Groups.  Micro credits enable the beneficiaries to raise their income levels and improve living standards.

* Credit to NBFCs for financing purchase of trucks by small road and water transport operator who do not own more than ten vehicles.
* Financing of portfolio purchases, i.e. purchase of hire purchase receivables from NBFCs
* Loan to forestry, food and agro processing sector
* Loans to NBFCs or other financial intermediaries for lending to the tiny sector
* Finance to Housing and Urban Development Corporation (HUDCO)
* Loans to software industry having credit limit of up to Rs. 1 Crore from the banking system
* Investment in venture capital
* Loans to NBFCs for lending to agriculture
* Housing loans up to Rs. 5 Lacs in rural and semi-urban areas and up to Rs. 10 Lacs in urban and metropolitan areas
* Investment in bonds issued by National Housing Bank or Housing and Urban Development Corporation
* Financing of activities relating to the setting up of agricultural clinic and agricultural business centres.
* Export credit granted by foreign banks operating in India

Apart from these different schemes/areas identified for deployment of funds by commercial banks on priority basis, there are other Government sponsored schemes for which also the commercial banks have to extent finance on priority basis.  Government fixes the targets of the number of beneficiaries under these schemes for an year, which is divided state and district wise.  Targets are then allocated to the participating banks.  Following are some such important schemes.

1. Prime Minister's Rozgar Yojana (PMRY) is a scheme meant to provide sustained self-employment in micro enterprises to educated unemployed youth.

2.  Swarnajayanthi Shahari Rozgar Yojana (SSRY) aims at providing gainful employment to the urban poor, unemployed or underemployed, through setting up of self-employment ventures or provision of wage employment

3. Swarnajayanthi Grama Swarozgar Yojana (SGSY) is a scheme that aims at establishing a large number of micro enterprises in the rural areas.  Beneficiaries under this scheme are individuals or groups below poverty line, especially those in the vulnerable sections of rural poor.  Target for beneficiaries is fixed as SC/ST section, minimum 50% women, minimum40% and disabled, minimum 3%.

RBI fixes the target for priority sector credit by commercial banks, which it will modify according to changing priorities.  The targets are now fixed as follows:

Public and Private sector banks

Total priority sector advances 40% of net bank credit
Total agricultural advance 18% of net bank credit
Advances to weaker sections 10% of net bank credit

Foreign banks operating in India

Total priority sector advances 32% of net bank credit
Advances to SSIs 10% of net bank credit
Export credit 12% of net bank credit.

As per RBI rules, if there is any shortfall in priority sector lending from the above targets and sub targets, the concerned bank should deposit an amount equivalent to the shortfall with Small Industries Development Bank of India (SIDBI).

As mentioned above priority sector credit has now been mandated to be at 40% level of the total credit, with agriculture sector occupying 18% of the total credit.  Direct advances in agriculture and allied activities have to be at a minimum 13.5% level and indirect loans at 4.5% level of the farm credit.  Advances to rural artisans, village craftsmen and cottage industries should constitute 12.5% of the total advances to SSI sector.  Not less than 25% of the total priority sector advances should be deployed for the people below the poverty line.

Over the years banks appear to be losing interest in financing priority sector for a variety of reasons.  Some of the important reasons for this indifference are the following:

* Relatively higher incidence of Non-performing assets due to priority lending
* Difficulty in maintaining large number of small accounts
* Inadequacy of collateral
* Low repayment ethics among farmers consequent to the loan waivers in the past
* Increase in cost of operations and consequent decrease in profit margin .
* Increased stress and strain to the staff.

The performance of Indian commercial banks in priority sector lending activities was worth mentioning.  The priority sector credit stands at 36.8% for scheduled commercial banks as on 31.3.2009.  Farm credit, which mandated to be at 18% level of the net bank credit, was at a level of less than 16% by 2004.  There was a sharp fall in the number of accounts from 2.03 crores (2000) to 1.99 crores (2009) thereby manifesting the rather undesirable preference of banks for bigger borrowers with higher credit limits instead of larger number of small borrowers who should be the real targets if the social purpose in bank lending were to be met.  Direct credit to agriculture stood at 8.2%, which showed the bankers preference in indirect credit comprising of finance for distribution of fertilizers and other inputs etc.  Credit to SSI sector has steeply fallen from 13.8% of bank net credit (2000) to 8.2% (2009).  So was the number of accounts from 29.6 lakhs to 18.1 lakhs.  While other priority sector performed relatively better in terms of bank finance, it was agriculture and SSI 10% of the net bank credit stood at only 7% (2009) for public sector banks and at less than 2% for private banks, a clear sign that banks are chasing the stronger section and not the weaker section which goes against the philosophy behind direct lending.

References:

1. Tannan M.L. Banking law and practice
2. Khan M.Y. Indian Financial System
3. Sinkey, Joseph Commercial banks Financial management
 


Praveen. P
S3 MBA
Jawaharlal Business School
Kerala
 

Source: E-mail September 24, 2011

 

           

 

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