147 PRIORITY SECTOR LENDINGS BY COMMERCIAL BANKS IN INDIA ABSTRACT DR. SANDEEP KAUR* *Department of Economics, Punjabi University Patiala. 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 19671968. The government initiated measures for social control over banks in 19671968 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 19971998 to 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 postnationalisation 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
148 Lending and the 20Point 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, 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 subtargets 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 employmentintensive such as agriculture, and tiny and small enterprises which came into effect from 30 April,. 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, subtargets for lending to individual priority sectors (Table 1). In addition to these limits, also a provision has TABLE 1: TARGETS UNDER PRIORITY SECTOR LENDING Total Priority Sector Advances Total Agricultural Advances Domestic Commercial Banks 40 per cent of ANBC or 18 per cent of ANBC or Foreign Banks 32 per cent of ANBC or No Target Small Enterprise Advances No Target 10 per cent of ANBC or Export Credit Export Credit is not a part of priority sector for domestic commercial banks 12 per cent of ANBC or Advances to Weaker Sections 10 per cent of ANBC or No Target
149 Source: Master Circular on lending to Priority Sector dated July1, 2009. Published by RBI, Mumbai. Note: ANBC: the Adjusted Net Bank Credit. : Credit Equivalent of OffBalance 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, however marginally fell short of the target of 40 per cent in March. They also failed to achieve the various subtargets for agriculture (except ), 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 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 subtargets for export credit and nearly achieve the subtarget 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 subtarget of 12 per cent. Looking at the percentage share of credit to the subgroups 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.
150 TABLE 2: PRIORITY SECTOR LENDING BY SCHEDULED COMMERCIAL BANKS PUBLIC SECTOR BANKS (AMOUNT IN RS. CRORE) Item 1997 1999 1998 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 37631 45296 53571 63082 73507 84435 109917 155220 202614 249397 (15.7) (14.2) (14.3) (15.7) (15.9) (15.4) (15.1) (15.3) (15.3) (15.4) (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) _
151 Item 1997 1999 1998 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 3257 40230 5394 8022 11873 14730 21636 36712 52034 58566 (9.7) (9.5) (8.3) (8.5) (8.5) (11.2) (14.2) (13.5) (13.6) (12.7) (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
152 (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, these figures represent percentage to adjusted net bank credit (ANBC) or credit equivalent amount of offbalance sheet exposure, whichever is higher. 2. * indicates the revised guidelines on priority sector advances issued on April 30, take into account the revised definition of small and micro enterprises as per the Micro, Small and Medium Enterprises Development Act,. 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, microcredit, education and housing.
153 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 subtarget but not as much as foreign banks. Nonachievement 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 writeoff of nonperforming 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. (), Financial Sector Reforms and the Weaker Sections of the Society, Journal of the Indian Institute of Bankers, Vol. 73, No. 2, AprilJune, pp. 1726. Uppal, R.K. (2009), Priority Sector Advances: Trends, Issues and Strategies, Journal of Accounting and Taxation, Vol. 1(5), December, pp. 079089. Roy, Mohua (), A Review of Banking Lending to Priority and Retail Sectors, Economic and Political Weekly, Vol. XLI, No. 11, March 1824, pp.10351040 Sen, Sunanda and Ghose, Soumya Kanti (), Basel Norms, Indian Banking Sector and Impact on Credit to SMEs and the Poor, Economic and Political Weekly, Vol. XL, No. 12, March 1925, pp. 11671180. 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.