PRIORITY SECTOR BY COMMERCIAL BANKS Lending
A Review of Priority Sector Lending by Commercial Banks in India Introduction To The Study
Availability of cheap and Adequate credit is a boon for the Economic Development of a country. By providing credit two farmers, industries, traders and businessmen the economic progress achieved Can ask. The banking system Can Influence economic growth by enhancing resources in the direction of national objectives and Priorities.
The banks play a very Crucial role in the process of economic development and so the Availability of banking infrastructure is Considered as one of the Prerequisites for rapid and balanced development of the country. The banks in India garden an Important Responsibility of the chanalizing funds with Most Important Sectors two fulfill the predetermined objectives. There is a rapid expansion in banking, deposit mobilization and credit development due two Which There is change in the scope of banking operations.
Lending Thurs Priority Sectors City Commercial Bank
The concept of priority sector was evolved in the late Sixties in order two focus attention on the need to ensure Adequate credit facilities two certainties Neglected Sectors of the economy Particularly in the rural areas. The involvement of banks in priority sector Lending ha grown considerably with special emphasis Wed opening branches in un-banked areas.
With a view
two ensure flow of credit To The Neglected Sectors like Agriculture and small scale industries, the concept of priority sector Lending was evolved and commercial banks were advised that two grant Least 40 Percent of Their Total Advances two priority sector comp rising of Agriculture, small scale industries, small road and transportation opera Thurs, retail trade, small business, professional and self employed persons, education Which Stood that 14 Percent of the total Advances in 1969, Increased 2:46 Percent as at the end of 1988. And the Percentage of Advances two priority sector was 35 hum 1997.
Side by side with the expansion of bank deposits and ha Been There continued expansion of bank credit reflecting the rapid expansion of industrial and Agricultural output. The banks are Also meeting the credit Requirements of industry, trade and Agriculture on a scale much saves the Than before, just as Bank Deposits expanded garden, bank credit expanded tremendously too ha Particularly since July 1969, from about Rs.4, 700 crore in 1970-71 two Rs.7, 25,370 crore hum 2002-2003.
In recent years, bank credit ha picked up smartly by around 20 2:21 Percent per year and garden Contributed Many factors two this:
1. Increase in credit facilities by commercial bank results in large reduction in spare Requirements (CRR / SLR); 2 Release of impounded cash balances during the incremental cash reserve ration (ICRR); 3.Sharp increase item in food credits Mainly due two Increased food procurement operation; 4.Increased demand for credit from public undertakings and the large increase item in export credits, and 5.Fall In the interest due two RBI’s cheap money policy – rapid expansion in bank Lending for industry, for housing, for buying of cars etc,.
In the sphere of bank credit, howeve, something of the old abuse Regarding Bank Lending are still two with prompt program. For instance, bank credit is Freely available two well ESTABLISHED houses of industry and trade ‘without much difficulty while the tiny and small businessmen really find it Difficult two get credit from banks, even now, something Powerful But unscrupulous speculators are two comfortable use bank funds and shares two corner Acquire control over companies.
Before 1969 commercial banks had sat largely Neglected Agriculture on the ground That was two rural credit request under taken by cooperative credit societies and banks. Accordingly, They remained largely indifferent two credit needs of the framers of the Agricultural operations and for land improvement. This was regarded as a basic reason for the failure of planning in the Agricultural sector and consequently for the failure of the general planning. At the same time, as the banks were owned and controlled by big Industrialists before nationalization, small industrial concern and business units were ignored by banks.
Soon after nationalization, the commercial banks were Asked To Be Specially Concerned with the financing of priority sector of Agriculture, small scale industry and small business and transportation opera Thurs, In course of time, Other priority Sectors Also added were, Such as retail trade, professional and self-employed persons, education, housing loans to weaken sections and Consumption Loans.
The rationale of priority sector Lending was one of the Causes for the nationalization of the top 14 banks in 1969. howeve, it was the Working Group on the Priority Sector Lending and the 20 Point Economic Programme chaired by Dr.KSKrishnaswami Which Clearly spelled out the concept:
The concept of Priority Sector Lending is intended Mainly two ensure That assistance from banking system Hubble flows in an increasing manner Those two Sectors of the economy Which though accounting for a Significant Proportion of the national product garden nets Thank Adequate support of Institutional finance in the past. “
The different segments of the priority sector are as follows:
1 Agriculture
2 Small Scale Industries
3 Small Road and Water Transport Operators
4 Retail Trade
5 Small Business
6 Professional and Self-employed person
7 Education
8 Housing Finance
The Reserve Bank of India Approved certainties two Directives Regarding the commercial bank’s Priority Sector Lending. Priority Sector Advances Hubble constitute 40 Percent of aggregate bank credit. Out of the priority sector Advances Least 40 Percent Hubble ask allocated two Agriculture. Direct Advances two the Weak sections in Agriculture and allied activities in rural area Hubble form that Least 50 Percent of the total direct Lending two Agriculture. Bank credit two rural artisans village and cottage industries Hubble that Least ask 12.5 Percent of the total Advances two small-scale industries. About 12 Percent of bank credit Hubble go to Exporters. The commercial banking system and public sector Particularly the bank under the Influence of the finance ministry and the Ruling party politicians overtook two priority Lending enthusiastically.
The total credit extended by the public sector bank’s two Agriculture, small-scale industry and Other Sectors priority Went up from Rs.440 crores in June, 1969 two Rs.1.71, 190 crores in March 2002. As a result, Advances two priority Sectors as Percentage of total credit from Increased 15 Percent in June 1969 2:43 Percent in March 2002. The rate of progress was quite rapid soon after nationalization But leaving was more Modest progress. The Relatively slow progress of Advances To The priority was Sectors Due to the fact That the bank officials from top to bottom were not imbued with the new objectives of banking. At the sametime banks were worried that Also the poor and unsatisfactory recovery performance of the Agricultural and small sector.
Table
PUBLIC SECTOR BANKS ‘ADVANCE TO PRIORITY SECTOR:
AMOUNT OUTSTANDING (Rupees in crore)
Priority Sector
June 1960
June 1971
June 2002
March 2004
Agriculture
160
340
63.080
90.540
S.S.I
260
440
49.740
65.850
Other Priority Sector
20
130
53.710
1,07,440
Total P.S Advances
440
910
1,71,190
2,63,830
Total bank credit
3020
4080
3,96,950
7,64,380
Percentage of Priority Sector Advances two total bank credit
12
25
43
34
Source: – RBI Annual Report 2003-2004
The priority sector Advances include small shuttle opera Thurs, self-employed persons, rural artisans, etc., inclusive of funds provided by RRBs by Their sponsoring bank, loans two software industry, food and agro-processing sector. The initial enthusiasm in favor of priority sector Lending gradually wanted Because of certainties concrete problems faced by the banking sector.
In Their anxiety two reach the target of 40 Percent, the bank Went in for indiscriminate Lending. In Many cases, There was external pressure too on the banking sector weaken two loins two sections.
As
priority sector loans were small accounts, public sector banks were not comfortable two monitor the distribution, follow-up and recovery of tiny loans. This Increased Their costs’ on the one side and aversely AFFECTED Their profit ability, on the other. The commercial banks were squeezed in bothering highways. On the Other Hand, They were forced two keep a high Proportion of Their Deposits as much as 53.3 Percent 2:55 in liquid reserves till 1992 under the CRR (15%) and SLR Konvertibelt (38.5%). They had sat, Therefore, only about 45 Percent of the deposit resources for Loans and Advances.
Even out of 45 Percent These limited resources deposit, bank were two Allocate 40 Percent of Their available resources, as the loan two priority sector. What was still worse That was much of the priority sector Lending is two to ask that a low concessional rate of interest. The result was the banking sector That was unable to Satisfy the Requirements of Other credit sector. At the sametime, Their profit-ability was badly squeezed and juice of the bank incurred huge unloaded.
The Bank Lending two priority sector was not uniform in all states. Actually, it was quite low in Many backward states like UP, Bihar, Rajasthan, etc. In order two attains 40 Percent of the target for the country as a whole, The banks were stepping up Their Loans To The priority sector in the more advanced states. This Further worsened the Regional Imbalance in the country.
The Narasimhan Committee on the financial system, 1991 was Against the continuance of the priority sector Lending. The Committee recommended two redefining the priority sector as follows. It fixed Hubble ask that 10 Percent of the aggregate bank credit. It Should Be reviewed after a period of three years. It Should Be Completely phased out gradually. The government of India did not accept this recommendation. How’s, the panel of banks constituted by the Indian Banks’ Association Suggested To The Narasimhan Committee on Banking Sector Reforms (1998 ) That the present priority sector credit limit of 40 Percent of the net bank credit Hubble ask slashed October 2 Percent primarily for three Reasons. Operating Expense for small loans was very high due two deployment of large number of field staff. Success of recovery process was very low in Agriculture and small-scale sector, and Quality of assets was bad as There were too many risk factors.
The government extending subsidies Directly To The bank INSTEAD of routing restriction through intermediaries.
The banks ‘panel Also Suggested That the interest rate Wed priority sector Lending Hubble ask deregulated and the bank’s request allowed two fix Their Own rate of interest depending on the cost of funds, risk cost, administration and transaction costs’ and profit margin. The panel argued That the priority Sectors Identified Would not ask starved of credit as banks Would service restriction According to Their Expertise Lending by the market-related interest rates.
In order
two speed up recovery from the priority sector borrowers, the panel Suggested That the disbursement target for Various branches at the state and district levels Hubble ask Linked To The Percentage of recovery. The panel ha Called for setting up a debt recovery Tribunal for small loans and Adequate legal support for the recovery of assets. Bank Hubble Also ask empowered two takeover assets in case of default.
Side by side with the expansion of bank deposits and ha Been There continued expansion of bank credit reflecting the rapid expansion of industrial and Agricultural output. The banks are Also meeting the credit Requirements of industry, trade and Agriculture on a much large scale Than before, just as Bank Deposits expanded garden, bank credit expanded tremendously too ha Particularly’s July 1969, from about Rs.4, 700 in 1970-71 two corers corers 10,92,890 hum 2004 – 05.An Analysis Of Trends In Priority Sector Lending By Bank In India
Here, the trends in advance two priority sector and its Various segments, banking GroupWise achievements in priority Sector, activity-wise credit two Various segments and its sub-segment, two credits will weaken sections and credit extended under the differential rate of interest scheme ha Been Presented. Further, the performance of banks in Lending two priority sector and the targets set for the restriction Also Been Analyzed garden.
Growth of Priority Sector Advances of Commercial Banks Excluding RRBs.
The details relating two growth rates of priority sector Advances and bank credits are the dealer button in the follo wing table.
Chart
Growth Rate of Outstanding Advances two priority sector and bank credit and share of two PS Advances Bank Credit
A segment – wise analysis of credit extended by scheduled commercial bank’s two Various segments of priority sector is Presented here below.
Credit two Agriculture
The number of accounts covered under the Agriculture in priority sector declined from 2.03 crore in 1995 two 1.99 crore in 2004. howeve, two outstanding Advances Agriculture had sat Increased substantially hum the period from Rs, 24,200 crore two Rs.99, 302 crore, registering an average annual growth rate of 16.6 per cent. Advances Out standing two Agriculture as a Percentage of Net Bank Credit had sat Recorded a negligible increase item from 11.4 per cent as at the end of 1995 Thurs 11.5 as at the end of 2004.
The average annual growth of direct finance two Agriculture was lower that the 13.9 per cent hum 1995-2004. The share of direct finance two Agriculture Agricultural Credit in total declined from 88.2 per cent in 1995 two 71.3 per cent in 2004. Direct finance two Agriculture as a Percentage of NBC had sat Also declined from 10.1 per cent Thurs 8.2 per cent above the hum season.
The share of credit for the distribution of fertilizers and Other inputs Which was the 2.2 per cent in 1995 Increased Thurs 4.2 per cent in 2004. The shares of Other types of indirect finance two Agriculture Agriculture two total credits Increased significantly from 4.8 per cent two 21.0 per cent hum the said period. As a Percentage of NBC, Other types of indirect finance two Agriculture Increased from 0.6 per cent Thurs 2.4 per cent.
Indirect two Agriculture credit provided by banks, comp rising of finance for the distribution of fertilizers and Other inputs and Other types of indirect finance, probably born at a rate of 30.8 per cent hum the corresponding period. [1]
It Would ask Observed That the share of indirect credit in total two Agriculture Agriculture credit Increased from 11.8 per cent in March 1995 Thurs, 07.28 per cent in March 2004 despite the fact That indirect Agriculture Advances are reckoned only two the Extent of 4.5 per cents while measuring the performance of banks in Achieving the target of 18 per cent of NBC in Agriculture. As a Percentage of NBC, two indirect credit Agriculture Increased from 1.4 per cent Thurs 3.3 Percent hum the above said period.
Chart
Percentage Share of Constituents of Agriculture Credit to
Total Agricultural Credit
Credit two Small-Scale Industries, Setting up of Industrial Estates and Small Road and Water Transport Operators .
Such Loans as a Percentage of NBC were at a negligible level.
The average annual growth rate of two Advances Road and Water Transport Operators was that 12.7 per cent hum 1995-2004 with per account outstanding amount that Rs.0.41 lakh in 1995 visa-vis Rs.1.40 lakh in 2004 two loans Road and Water Transport Operators as a Percentage of NBC declined marginally from 1.4 per cent two 1.0 per cent. The Significant Feature Observed in this Regard is the decline in the number of accounts in SSI and Other Sub Sectors over the period, while the amount outstanding Increased. This shows That enhanced credit limits were granted two Such two units meet Their Requirements.
Bank Group-wise two Priority Sector Credit
Public Sector Banks (PSBs)
The outstanding priority sector Advances of PSBs Increased by 21 Percent in 2003-04 as Against an Increase of 18.6 per cent hum 2002-2003. Düring the period 1995-2004, the average annual growth rate of Advances two priority sector by public sector banks was 17.6 per cent as Compared to average growth rate of the NBC 16.7 per cent in the same season. The growth in the higher priority sector Advances of PSBs hum the above period was primarily due Thurs 28.8 per cent average growth rate of Recorded by Other Sectors Which priority Compensated for the low average growth rate in credit two SSI (9.3 per cent) and Agriculture direct credit (15.7 per cent). The share of priority sector Advances in NBC of PSBs Increased 2:44 per cent in 2003-04 from 42.5 per cent in 2002-03. The growth in priority sector Advances of PSBs was fueled by the surge in the Loans and Advances Other priority two Various Sectors and robust growth of credit two the Agriculture sector (Chart 3) . Advances two Agriculture constituted 15.4 per cent of NBC of PSBs as on the last reporting Friday of March 2003. The share of Other Advances two priority Sectors in NBC of PSBs Increased 17.0 Percent two in 2003-04 from 15 per cent in 2002-03 . The number of accounts covered under Various major segment of priority sector declined over the period.
Table
PRIORITY SECTOR ADVANCE
(Rupees in crores)
Month and Year
Public Sector Banks
Private Sector Banks
Foreign Bank
March 1998
91.319
(41.9)
11.614
(40.9)
6940
(34.3)
March 1999
1,07,200
(43.5)
14.295
(41.3)
8270
(37.1)
March 2000
1,27,807
(43.6)
18.348
(39.4)
9699
(34.5)
March 2001
1,46,546
(43.0)
21.550
(38.1)
11.835
(34.1)
March 2002
1,71,185
(43.1)
21.530
(38.8)
13.414
(34.2)
Source: Report on currency and Finance, 2002.
Note: 1 Figure in brackets are Percentage shares in net bank credit in the respective groups.
2. The target for aggregate Advances To The priority sector is 40 per cent of the net bank credit for domestic banks and 32
Percent of net bank credit for the foreign bank.
Chart
Share of Priority Sector Advances of
Advances and its Segments (Public Sector Banks)
Private Sector Banks
Private sector banks’ Lending two priority sector as a Percentage of Their NBC ha Been showing an increasing trend. The share of Their Advances two priority sector in NBC had sat Increased from 44.4 per cent in 2002-03 two 47.4 Percent in 2003 – 04 hum the period from 1997 to 2004, average annual growth rate of priority sector Advances of Private sector banks was 29.5 per cent Which was Mainly Contributed by the growth in two Lending Other priority sector (44.7 per cent) and Agriculture (37.4 per cent ). In comparison, the average annual growth rate for Advance two SSI was that 8.4 per cent. In absolute terms, credit two Agriculture, SSI and Other Sectors had sat Increased priority.
The share of credit two Other priority sector category was the Highest that 23.1 per cent of NBC, followed by two Advances Agriculture and SSI. The Lending of private sector bank’s two Agriculture sector had sat Increased Thurs 12.3 per cent of net bank credit Their In 2003-04, the higher by 1.1 per cent in 2002-03 over That. The respective shares of credit two Agriculture, SSI and Other priority Sectors in total priority sector Advances of Private sector banks over the period from 1996 Thurs 2004 are Presented in chart I.4.
Chart
Share of Priority Sector Advances two and its Segments
(Private Sector Banks)
Advances two Weak Sections
As Against the target of 10 per cent of NBC, achievement in purveying credit weaken two sections by PSBs was To The Extent of around 7 per cent hum 2001 Thurs 2004. In the case of private sector bank, the achievement, Which varied Between 1.70 per cent in the year 2001 and 1.34 per cent in 2004, had sat fallen short of the target considerably.
Table
Advances two Weak Sections
As Wed Last Friday of March
Public Sector Banks
Private Sector Banks
Amount
(Rs. crore)
% of NBC
% NPA
Amount (Rs. crore)
% of NBC
% NPA
1
2
3
4
5
6
7
2001
24805.33
7.28
22.51
958.94
1.70
19.72
2002
28974.90
7.30
21.71
1142.06
1.82
10.30
2003
32303.75
6.76
19.39
1223.40
1.48
16.78
2004
41588.64
7.44
18.90
1495.49
1.34
12.15
Source: Report on Trend and Progress of Banking In India
Advances under Differential Rate of Interest (DRI) Scheme
The scheduled commercial banks are required two extendwatchlist advance under DRI Scheme To The Weakest of the Weak sections at a rate of interest of 4.0 per cent. A target of 1.00 per cent of outstanding amount of bank credit as at the end of Matrch of previous year ha Been fixed under the DRI scheme. As Against this, the public sector banks had sat attained a level of only 0.07 per cent as at the end the year 2004. The achievement, in Percentage terms, had sat Been persistently declining over the period. The number of beneficiaries and amount of loans outstanding garden Also declined over the years. howeve, the amount outstanding Increased marginally in 2004.
Table
Advances of Public Sector Banks under the DRI Scheme
As Wed Last Friday of March
No.of Accounts in lakh
Amount outstanding (Rs. In crore)
Total Bank Credit (Rs. In crore)
DRI Advances as a% of Total Bank Credit
1
2
3
4
5
1995
19.47
683
138648
0.49
1996
15.52
678
165377
0.41
1997
14.30
655
193963
0.34
1998
9.05
544
197186
0.28
1999
7.29
485
233852
0.21
2000
5.90
422
265554
0.16
2001
5.14
358
316446
0.11
2002
NA
NA
341292
NA
2003
3.70
299
396953
0.08
2004
3.68
315
477899
0.07
Source: Statistical Tables Relating two Banks in India
Bank-wise Frequency Distribution of Targets and Achievements
The frequency distribution in Various ranges of Achieving the target for priority sector Advance a Percentage two NBC as on March 2004 is the dealer button in the follo wing table. Out of 27 public sector banks, only nine banks achieved the target of 18 per cent relating two creditable two Agriculture. Among private sector banks, only 11 out of 30 banks had sat attained the target. As regards the achievement of target in respect “of two credits will weaken section (10 per cent), seven public sector banks achieved the target as Compared April 2 bank in the private sector .
Table 1.5
Frequency Distribution of Lending of Indian Scheduled
Commercial Bank’s Agriculture, Weak and Sections
Priority Sector Advances as a Percentage two NBC
Agriculture as% NBC – 2004
<12%
12-15%
15-18%
> 18
Total Bank
% NBC
Public sector Bank
3
6
9
9
27
% Share of Agriculture Credit
4.2
36.4
26.2
33.3
100
15.41
Private Sector Banks
15
3
1
11
30
% Share of Agriculture Credit
16.2
5.2
1.3
77.1
100
15.81
Weak Sections as NBC%
<5%
5-7%
7-10%
> 10
Total Bank
% NBC
Public sector Bank
8
7
5
7
27
% Share of Weak Sections
9.6
16.9
41.4
30.1
100
7.44
Private Sector Banks
25
0
1
4
30
% Share of Weak Sections
50.3
0
1401
35.6
100
1.34
Priority Sector Advances
<40%
40-44%
44-48%
> 48
Total Bank
% NBC
Public Sector Banks
2
9
10
6
27
% Share of Priority Sector
22.3
24.5
29.2
24
100
43.94
Private Sector Banks
12
2
2
14
30
% Share of Priority Sector
10.7
8.8
8.3
72.1
100
47.35
Source: Statistical Tables Relating two Banks in India
[1]. M. Narasimhan, “Working Group on Rural Banks”, RBI, Mumbai, pp 117-118