PRIORITY SECTOR LENDING IN INDIAN BANKING SECTOR

PRIORITY SECTOR LENDING IN INDIAN BANKING SECTOR AKHILA IBRAHIM K. K. Research Scholar Department of Commerce and Centre of Research PSMO College, Tirurangadi. ABSTRACT The main function of banks not limited to accept money or deposits but they need to perform another great and important function of accelerating these deposits to the development of different sectors of the country. India as a developing economy must give special and priority attention to certain sectors which is starved of capital. It was a great challenge before government of India and RBI to uplift this priority sector by providing financial aid to them. In order to achieve this aim RBI has introduced the concept of Priority Sector Lending (PSL) in its credit policy during 1967-68. The priority sector advances has undergone several changes, since then, several new areas and sectors has being brought within the purview of this sector. The term priority sector indicates those activities which have national importance and have been assigned priority for development. PSL is a specific rule by RBI to provide a specific portion of the bank lending to few specific sectors like Agriculture, Micro, Small and Medium Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy and Others. RBI has given several targets to banks to enhance loans in priority sector but out of these targets, banks have been succeeded to achieve only a few targets. The present study is an attempt to find out the trends of PSL among public, private and foreign banks in India and based on PSL targets fixed by RBI and the targets achieved by various banks. Secondary data which is collected from annual reports published by RBI such as statistical tables relating to banks in India and industry wise deployment of bank credit are used and data is analyzed for the period 212-216. Keywords: Priority Sector Lending, classification, trends, targets achieved. INTRODUCTION Banks normally give loans to those who, in their opinion is creditworthy. In this situation farmer, small entrepreneurs and other weaker section are excluded from banks advances list only because they are not considered creditworthy, accessible and well informed. It creates an important area thinking and policy making to RBI. And in 1969 RBI takes some rules and regulations for Priority Sector Lending. Priority Sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. PSL is an important role given by the RBI to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections (The Economic Times, 211). The categories of priority sector to scheduled commercial banks are; agriculture, MSMEs, export credit, education, housing, social infrastructure, renewable energy and others. For each section RBI fixed a target to be achieved by all banks which is based on the Adjusted Net Bank Credit (ANBC). ANBC means the net bank credit plus investments made by banks in non-slr bonds held in the held-to-maturity category or credit equivalent amount of off-balance-sheet exposure, whichever is higher. This paper makes an attempt to find out the current status of PSL in India, analyze and compare the target achieved by various banking groups. RESEARCH PROBLEM Since the early 197s, Priority Sector Lending (PSL) programme has been an integral part of the banking policy in India. It is a major public policy intervention through which credit is directed to the sectors of national priorities critical for both employment and equity. RBI has given several targets to banks to enhance loans in priority sector but out of these targets, banks havebeen succeeded to 39

achieve only a few targets. Banks in India have been called upon to perform the function of PSL and they have evolved special schemes and regulations for the deployment of credit to sectors that deserve primary care and attention. This explains the need for PSL by Indian banking sector. This situation creates a challenge into the study of Priority Sector PSL trends in Indian Banking Sector. OBJECTIVES To understand concept of Priority Sector Lending, its targets and classification. To study the targets and classification of PSL in India. To analyze targets achieved by various bank groups in India. RESEARCH METHODOLOGY The research design of this study is Priority Sector Lending by various banking groups. Population of the study is banking sector of India. The banking sector has been divided into three major bank groups; Public sector (26 banks including SBI and its associates), Private sector (2 banks) and Foreign banks (3 banks). Banks are selected on the basis of report provided by RBI in Distribution of Outstanding Advances of Scheduled Commercial Banks to Priority Sector and Others. Secondary data which is collected from various reports published by Reserve Bank of India and specific banks under public sector, private sector and foreign banks are used for the study. The study attempts to accomplish its objectives by making analysis of Priority Sector Lending by various bank groups over 5 years of data (212-216) and their target percentage (of Adjusted Net Bank Credit (ANBC) or Off Balance Sheet Exposure (OBE) whichever is higher) fixed by RBI. REVIEW OF LITERATURE R. K. Uppal (29) discusses the priority sector advances in India. He focused on the trend, issues and strategies of priority sector advances in India. The study concludes that public sector banks have not achieved the target of 4% while private sector banks have achieved the overall target. The author also show some issues of NPA, which is increased because of high priority sector advances. S. Krishnan Rao (212) studies the priority sector credit across the state and banks. It is a detailed study on Priority sector credit of each state and each and every banks, and focused mainly on the state Andra Pradesh. In the study he found that priority sector credit is increasing over state and banks, but they not achieved the target. Bhargav Pandya (215) analyses the impact of Priority Sector Advances in the profitability of Indian Scheduled Commercial Banks. The study measure the variables such as Priority Sector Advances to Total Assets, Return on Assets, Return on Investment, Return on Equity, Ratio of Operating Profit to Total Assets and Ratio of Interest Income to Total Assets. It has been found that Priority Sector Advances highly influences the profitability of Scheduled Commercial Banks in India. Shilpa Rani, Diksha Garg (215) aim to study the Priority Sector Lending trends, Issues and Strategies in India. Here an attempt is taken to compare the performances of Public, Private and Foreign Sector Banks in India. The study conclude that both public and private sector banks could not achieve the target and foreign banks reached at the target fixed by RBI. PRIORITY SECTOR LENDING IN INDIA The description of the priority sector was formalized in 1972 on the basis of the report submitted by the informal study group on statistics relating to advances to the priority sector, constituted by the Reserve Bank. Although, initially, there were no specific targets fixed in respect of priority sector lending in November, 1974. In coming years certain targets and sub targets are fixed by RBI for PSL, which was 33% of their total advances in 198. Subsequently, the target was enhanced to 4% of aggregate advances. On the basis of revised guidelines on lending to the priority sector, the priority sector lending target/sub-target have now been linked to adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposures, whichever is higher, with effect from 3 April, 27, and is 4% for public and private sector banks and 32% for foreign banks. Priority Sector Lending classification The broad categories of priority sector for all scheduled commercial banks are as under: a. Agriculture b. Micro, Small and Medium Enterprises c. Export Credit d. Education e. Housing 4

f. Social Infrastructure g. Renewable Energy h. Others Priority Sector lending targets Table 1: PSL s Categories Total Priority Sector Agriculture Micro Enterprises Domestic scheduled commercial banks and Foreign banks with 2 branches and above 4 percent of Adjusted Net Bank Credit [ANBC defined in sub paragraph (iii)] or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Foreign banks with 2 branches and above have to achieve the Total Priority Sector within a maximum period of five years starting from April 1, 213 and ending on March 31, 218 as per the action plans submitted by them and approved by RBI. 18 percent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher. Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., 7 per cent by March 216 and 8 per cent by March 217. Foreign banks with 2 branches and above have to achieve the Agriculture within a maximum period of five years starting from April 1, 213 and ending on March 31, 218 as per the action plans submitted by them and approved by RBI. The sub-target for Small and Marginal farmers would be made applicable post 218 after a review in 217. 7.5 percent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher to be achieved in a phased manner i.e. 7 per cent by March 216 and 7.5 per cent by March 217. Foreign banks with less than 2 branches 4 percent of Adjusted Net Bank Credit [ANBC defined in sub paragraph (iii)] or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher; to be achieved in a phased manner by 22 as indicated in sub table (i) below. Not applicable Not Applicable Advances to Weaker Sections The sub-target for Micro Enterprises for foreign banks with 2 branches and above would be made applicable post 218 after a review in 217. 1 percent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher. Foreign banks with 2 branches and above have to achieve the Weaker Sections within a maximum period of five years starting from April 1, 213 and ending on March 31, 218 as per the action plans submitted by them and approved by RBI. Not Applicable Source: RBI Circular DBOD.No.Ret.BC.36/12.1.1/213-14. 41

Amount outstanding in years (in billion) Asia Pacific Journal of Research Sub table (i): The Total Priority Sector target of 4 percent for foreign banks with less than 2 branches has to be achieved in a phased manner as under:- The Total Priority Sector as percentage of ANBC or Financial Year Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher 215-16 32 216-17 34 217-18 36 218-19 38 219-2 4 ANALYSIS AND INTERPRETATIONS Priority Sector Lending by Public Sector, Private Sector and foreign banks are analyzed and compared them with PSL targets fixed by RBI. Study also tries to find out the overall trend of PSL during 212-216 by various banking groups. 1. Priority Sector Lending by Public Sector Banks Table 2 indicates the priority sector lending by the public sector banks. The outstanding advances granted by public sector banks to the priority sector were at Rs. 1137billion as on March 212 and which is 37.2 percentage of ANBC and it increased to 19853 billion in March 216 which is 39.3 percentage just near to the target of 4 percentage. So till now the Public Sector Banks not achieved the target of PSL fixed by RBI. Advances to agriculture constituted 15.8% of ANBC during 212 and is 18.4% in 216 and advances to weaker section and MSMEs are also showing an increasing trend. Table 2: PSL by Public Sector Banks Year Total Priority Sector Agriculture Weaker section Micro and Small Advances Enterprises 212 1137 (37.2) 4786 (15.8) 2888 (9.5) 3966 (13.1) 213 12836 (36.3) 536 (15) 3473 (9.8) 4784 (13.5) 214 15193 (37.5) 6873 (17.) 434 (1.7) 5874 (14.5) 215 1759 (38.2) 7562 (16.5) 4888 (1.7) 654 (14.2) 216 19853 (39.3) 947 (18.4) 5476 (11.1) 734 (14.9) () Figures in bracket are the percentage of PSL to ANBC or OBE whichever is high. Priority sector lending target set at 4 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (OBE), whichever is higher as on March 31st 211. Source: Report on Trend and Progress of Indian Banking, RBI, Mumbai, various years (212-216) and Statistical tables relating to banks in India, RBI, various years (212-216) 2. Priority Sector Lending by Private Sector Banks Table 3 indicates the priority sector lending by the private sector banks. The amount outstanding to the priority sector were at Rs. 2864billion as on March 212 and which is 39.4 percentage of ANBC and it increased to 662 billion in March 216 which is 46.1 percentage crosses the target of 4 percentage. So Private Sector Banks achieved the target of PSL fixed by RBI. Advances to agriculture constituted 14.3% of ANBC during 212 and is 18.6% in 216 and advances to weaker section and MSMEs are also showing an increasing trend. Mainly the advances are given to MSMEs by private sector banks. 42

Amount outstanding in years(in billion) Amount outstanding in years (in billion) Asia Pacific Journal of Research Table 3: PSL by Private Sector Banks Year Total Priority Sector Advances 212 2864 (39.4) 142 (14.3) 213 3274 1119 (37.5) (12.8) 214 4667 1478 (43.9) (13.9) 215 533 1818 (43.2) (14.8) 216 662 2668 (46.1) (18.6) () % of ANBC (target 4%), Source: Same as Table 2. 3. Priority Sector Lending by Foreign Banks Agriculture Weaker section Micro and Small Enterprises 389 (5.4) 55 (5.7) 62 (5.7) 737 (6) 1361 (9.5) 115 (15.2) 1417 (16.2) 1868 (17.6) 2166 (17.6) 2923 (2.4) Table 4 indicates the priority sector lending by the private sector banks. The amount outstanding to the priority sector were at Rs. 85billion as on March 212 and which is 4.9 percentage of ANBC and it increased to 113 billion in March 216 which is 32.8 percentage just crossed the target of 32 percentage but it is declined from the year of 212 i.e., 4.9%. So Foreign Banks achieved the target of PSL fixed by RBI. Advances to agriculture, weaker section and MSMEs are also showing a decreasing trend. Table 4: PSL by Foreign Banks Year Total Priority Sector Advances Agriculture 212 85 (4.9) 213 133 (35.2) 214 9 (34.4) 215 966 (32.2) 216 113 (32.8) () % of ANBC (target 32%), Source: Same as Table 2. 1 (.1) 72 (2.4) 17 (.6) 42 (1.4) 65 (1.9) Weaker section Micro and Small Enterprises 217 (11) 55 283 (1.9) (9.6) 11 196 (.4) (7.5) 26 231 (.9) (7.7) 4 287 (1.2) (8.5) 4. Total Priority Sector Lending by all bank groups Chart 1: Total PSL by Public sector, Private sector and foreign bank groups. 225 2 175 15 125 1 75 5 25 Years Public Sector Banks Private Sector Banks Foreign Banks Source: Report on Trend and Progress of Indian Banking, RBI, Mumbai, various years (212-216) and Statistical tables relating to banks in India, RBI, various years (212-216) 43

Percentage of ANBC/OBE Asia Pacific Journal of Research Figure 1 shows the total PSL trends by various banking groups from 212 to 216. From the figure it can be seen that public sector banks have an increasing trend in PSL with a highest rate, private sector banks also have an increasing trend but with a diminishing rate and foreign banks shows a declining trend. 5. Priority Sector Lending targets achieved by Public and Private Sector banks. Public and Private sector banks needs to achieve a PSL target of 4% of ANBC or credit equivalent amount of OBE, whichever is higher as on March 31 st 211. Figure 2 shows the PSL targets achieved by public and private sector banks over 5 years from 212 to 216. From the figure it can interpret that private sector banks achieved the target fixed but PSL of public sector banks are not reached the target but it is showing an increasing trend and expected to cross the target by coming years. Chart 2: PSL targets achieved by public and private sector banks 5 45 4 35 3 25 2 15 1 5 Years Public sector banks Private Sector Banks Source: Same as Chart 1. 6. Priority Sector Lending targets achieved by Foreign banks. The PSL target of foreign banks is fixed at 32% of ANBC or credit equivalent amount of OBE, whichever is higher as on March 31 st 211. Figure 3 shows the PSL targets achieved by foreign banks over 5 years from 212 to 216.From the figures it can be conclude that foreign banks achieved the target fixed but it shows a declining trend and it may fall from the target in next 5 years. Chart 3: PSL targets achieved by foreign banks 45 4 35 32 3 25 2 15 1 5 Source: Same as Chart 1. 44

7. PSL targets of agriculture, weaker section and MSMEs achieved by public and private sector banks Chart 4: Agricultural advance by public and private sector banks 2 18 18 16 14 12 1 8 6 4 2 Source: Same as Chart 1. Every public and private sector banks needs to give 18% of their ANBC to agricultural sector. Figure 4 shows the agricultural advances by public and private sector banks. Both banking groups have an increase agricultural advance but they just achieved the target in 216. The target fixed for advances to weaker section is 1%. Figure 5 shows the advances to weaker section and it can be seen that public sector banks achieved the target and private sector banks are just near to 1%, and it is expected to achieve it in coming years. Chart 5: Advances to weaker section by public and private sector banks 12 Public Sector Banks Private Sector Banks 1 1 8 6 4 Public sector banks Private sector banks 2 Source: Same as Chart 1. Every public and private sector banks needs to give 7.5% of their ANBC to Micro, Small and Medium Enterprises (MSMEs). Figure 6 shows the advances to MSMEs by public and private sector banks. Both banking groups have a highest advance in MSME sector and the percentage is very high by comparing the target of 7.5%. They also show an increasing trend. 45

Chart 6: Advances to MSMEs by public and private sector banks 25 2 15 1 7.5 5 Public sector banks Private sector banks Source: Same as Chart 1. CONCLUSION The term priority sector indicates those activities which have national importance and have been assigned priority for development. PSL is a specific rule by RBI to provide a specific portion of the bank lending to few specific sectors like Agriculture, Micro, Small and Medium Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy and Others. From the above analysis and interpretation it can be conclude that priority sector lending of public and private sector banks shows an increasing and foreign banks shows a decreasing trend. In spite of increasing PSL Indian banks have not achieved the targets fixed by RBI in some areas. Private sector and foreign banks achieved the target fixed by RBI and public sector banks are reached just near to the target in 216.Public and private sector banks achieved the target of agricultural advances in 216 and have a higher advances percentage in MSMEs And only public sector banks gives targeted advances to weaker section. So, PSL of public and private sector banks are increasing and foreign banks is declining. These 3 bank groups need to focus more on advances to agriculture and weaker sections. REFERENCES 1. Ahmed, J. U.-d. (21). Priority Sector Lending By Commercial Banks in India: A Case of Barak Valley. Asian Journal of Finance & Accounting, 2 (1), 92-11. 2. Baijal, A. (215). High Ratio of Agriculture NPAS In Priority Sector Lending By Public And Private Banks In India Reasons, Suggestions And Discussions. International Journal of Science and Research (IJSR), 4 (4), 882-886. 3. Dave, D. K. (216). A Study of Priority Sector Lending for Selected Public Sector Banks of India. IJRAR- International Journal of Research and Analytical Reviews, 3 (3), 84-86. 4. Jain, S., Parida, T. K., & Ghosh, D. S. (215). Rethinking Priority Sector Lending for Banks in India. Mumbai: IIBF Macro Research Paper for the Year 214-15. 5. (215). Lending to Priority Sector. Mumbai: RBI. 6. Pandya, D. B. (215). Impact of Priority Sector Advances on Banking Profitability: Evidence from Scheduled Commercial Banks of India. BVIMSRs Journal of Management Reserach, 7 (2), 75-81. 7. Rani, S., & Garg, D. (215). Priority Sector Lending: Trends, Issues and Strategies in India. International Journal of Management and Social Science Research, 4 (1), 24-28. 8. Rao, D. S. (212). Priority sector credit across states and banks: Issue of Inclusiveness-Equity across regions and impact assessment in A.P. Secunderabad: National Academic development. 9. RBI. (213). Circular DBOD.No.Ret.BC.36/12.1.1/213-14. Mumbai: RBI. 1. RBI. (214). Circular DBOD.No.Ret.BC.93/12.1.1/213-14. Mumbai: RBI. 11. RBI. (214). MASTER CIRCULAR- Priority Sector Lending-s and Classification. Mumbai: RBI. 12. The Economic Times. (211, May 1). Priority Sector Lending. Retrieved January 28, 217, from http://www.economictimes.indiatimes.com 13. Uppal, R. K. (29). Priority sector advances: trends, issues and strategies. Journal of Accounting and Taxation, 1 (5), 79-89. 46