PRIORITY SECTOR LENDING BY COMMERCIAL BANKS
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 to farmers, industries, traders and businessmen the economic progress can be achieved. 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 have an important responsibility of chanalizing the funds with most important sectors to fulfill the predetermined objectives. There is a rapid expansion in banking, deposit mobilization and credit development due to which there is change in the scope of banking operations.
Lending To Priority Sectors By Commercial Banks
The concept of priority sector was evolved in the late sixties in order to focus attention on the need to ensure adequate credit facilities to certain neglected sectors of the economy particularly in the rural areas. The involvement of banks in priority sector lending has grown considerably with special emphasis on opening branches in un-banked areas.
With a view to 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 to grant at least 40 percent of their total advances to priority sector comprising of agriculture, small scale industries, small road and transport operators, retail trade, small business, professional and self employed persons, education which stood at 14 percent of the total advances in 1969, increased to 46 percent as at the end of 1988. And the percentage of advances to priority sector was 35 during 1997.
Side by side with the expansion of bank deposits, there has been 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 larger scale than before, just as bank deposits have expanded, bank credit too has expanded tremendously particularly since July 1969, from about Rs.4,700 crorers in 1970-71 to Rs.7,25,370 crorers during 2002-2003.
In recent years, bank credit has picked up smartly by around 20 to 21 percent per year and many factors have contributed to this:
1. Increase in credit facilities by commercial banks results in large reduction in reserve requirements (CRR/SLR); 2. Release of impounded cash balances under incremental cash reserve ration (ICRR); 3.Sharp increase in food credit mainly due to increased food procurement operation; 4.Increased demand for credit from public undertakings and the large increase in export credit; and 5.Fall in the interest due to 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, however, some of the old abuses regarding bank lending are still to be met with. For instance, bank credit is freely available to well established houses of industry and trade without much difficulty while the tiny and small businessmen really find it difficult to get credit from banks; even now, some powerful but unscrupulous speculators are able to use bank funds to corner shares and acquire control over companies.
Before 1969 commercial banks had largely neglected agriculture on the ground that rural credit was to be undertaken by cooperative credit societies and banks. Accordingly, they remained largely indifferent to the credit needs of framers for 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 general planning. At the same time, as the banks were owned and controlled by big industrialists before nationalization, small industrial concerns 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 business and small transport operators, In course of time, other priority sectors were also added, such as retail trade, professional and self-employed persons, education, housing loans for weaker sections and consumption loans.
The rationale of priority sector lending was one of the causes for nationalization of the top 14 banks in 1969. However, it was the Working Group on the Priority Sector Lending and the 20 Point Economic Programme chaired by Dr.K.S.Krishnaswami which clearly spelt out the concept:
The concept of Priority Sector Lending is mainly intended to ensure that assistance from banking system should flows in an increasing manner to those sectors of the economy which though accounting for a significant proportion of the national product have not received 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 persons
7. Education
8. Housing Finance
The Reserve Bank of India issued certain directives to the commercial banks regarding Priority Sector Lending. Priority Sector Advances should constitute 40 percent of aggregate bank credit. Out of priority sector advances at least 40 percent should be allocated to agriculture. Direct advances to the weaker sections in agriculture and allied activities in rural area should form at least 50 percent of the total direct lending to agriculture. Bank credit to rural artisans village and cottage industries should at least be 12.5 percent of the total advances to small-scale industries. About 12 percent of bank credit should go to exporters. The commercial banking system and particularly the public sector banks under the influence of the finance ministry and the ruling party politicians took to priority lending enthusiastically.
The total credit extended by the public sector banks to agriculture, small-scale industry and other priority sectors went up from Rs.440 crores in June, 1969 to Rs.1.71,190 crores in March 2002. As a result, advances to priority sectors as percentage of total credit increased from 15 percent in June 1969 to 43 percent in March 2002. The rate of progress was quite rapid soon after nationalization but later progress was more modest. The relatively slow progress of advances to the priority sectors was due to the fact that the bank officials from top to bottom were not imbued with the new objectives of banking. At the same time banks were also worried at the poor and unsatisfactory recovery performance of the agricultural and small sectors.
Table
PUBLIC SECTOR BANKS’ ADVANCES TO PRIORITY SECTORS:
AMOUNT OUTSTANDING (Rupees in Crores)
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
3,020
4,080
3,96,950
7,64,380
Percentage of Priority Sector Advances to total bank credit
12
25
43
34
Source :- RBI Annual Report 2003 – 04
The priority sector advances include small transport operators, self-employed persons, rural artisans etc., inclusive of funds provided by RRBs by their sponsoring banks, loans to software industry, food and agro-processing sector. The initial enthusiasm in favor of priority sector lending gradually wanted because of certain concrete problems faced by the banking sector.
In their anxiety to reach the target of 40 percent, the banks went in for indiscriminate lending. In many cases, there was external pressure too on the banking sector to lend to weaker sections.
As priority sector loans were small accounts, public sector banks were not able to monitor the distribution, follow-up and recovery of tiny loans. This increased their costs on the one side and aversely affected their profitability, on the other. The commercial banks were squeezed in both ways. On the other hand, they were forced to keep a high proportion of their deposits as much as 53.3 to 55 percent in liquid reserves till 1992 under CRR (15%) and SLR provisions (38.5%). They had, therefore, only about 45 percent of the deposit
Tags: banks, Commercial, LENDING, PRIORITY, Sector