PRIORITY SECTOR LENDING – A REVIEW

                PRIORITY SECTOR LENDING – A REVIEW

(This article was presented in the National Seminar at SR&BGNR College Khammam, AP - India)

                                 

                                                                                    -Dr. S. Vijay Kumar

                 The origin of priority sector prescriptions for banks in India can be traced to the Credit Policy for the year 1967-68, wherein it was emphasized that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture, exports and small-scale industries, as a matter of urgency. However, 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 Sectors constituted by Reserve Bank in May 1971. On the basis of this report, Reserve Bank prescribed modified priority sector advances and certain guidelines in February 1972, indicating the scope of the items to be included under various categories of priority sector. In most of these cases, the guidelines indicated only the general description of the advances to be included and no ceilings were fixed, except in the case of small-scale industry and road and water transport operators where ceilings on the value of original investments were indicated.

Nationalization of banks and after:

                  The nationalization of the 14 major commercial banks in July 1969 led to a considerable reorientation of bank lending, especially to the priority sectors of the economy, which had not previously received sufficient attention from the commercial banks. It gave an impetus to the process of reallocation of banking resources to suit the socio-economic needs of the country. There was a greater involvement of banks in these and other socially desirable sectors. Moreover, institutional credit facilities at reasonable rates of interest were extended to a large number of borrowers of small means such as small farmers, small-scale manufacturers, retail traders, road transport operators, small businessmen, professionals and self-employed persons, and also for education. One of the objectives of nationalization of 14 major commercial banks was to ensure that no viable productive endeavor should falter for lack of credit support, irrespective of the fact whether the borrower was big or small. Thus, the concept of priority sector lending was evolved further to ensure that assistance from the banking system flowed in an increasing measure to the vital sectors of the economy and according to national priorities.There have been several changes in the composition of priority sector over the years. At present, the priority sector broadly comprises agriculture, SSI and other segments such as small business, retail trade, small road and water transport operators, professional and self-employed persons, housing, education loans, micro credit, software, etc.The definition of weaker sections in priority sector has also been revised and accordingly, the weaker sections in priority sector are now defined as:
a) Small and marginal farmers with land holdings of 5 acres and less, landless labourers, tenant farmers, and share croppers;
b) Artisans, village and cottage industries with individual credit requirements not exceeding Rs.50,000/-;
c) Beneficiaries of the Swarnajayanti Gram Swarojgar Yojana (SGSY);
d) Scheduled Castes and Scheduled Tribes;
Categories of priority sector advances:
The broad categories of priority sector for all scheduled commercial banks are as under:
Agriculture (Direct and Indirect Finance):
Direct finance to agriculture includes short medium and long term loans given for agriculture and allied activities directly to individual farmer, self-help groups (SHGs) or joint liability groups (JLGs) of individual farmers without limit and to others (such as corporate partnership firms and institutions) up to Rs. 20 lakh for taking up agriculture allied activities. Indirect finance to agriculture includesloans given for agriculture and allied activities.
Small scale industries (Direct and Indirect Finance):
Direct finance to small scale industries (SSIs) includes all loans given to SSI units which are engaged in manufacture, processing or preservation of goods and whose investment are in plant and machinery (original cost) excluding land and building.
Small business/service enterprises:It includes small business, retail trade, professional and self employed persons, small road and water transport operators and other enterprises.
Micro credit:Provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards,constitutes micro credit.
Education loans:Education loans include loans and advances granted to individuals for educational purpose, up to Rs. 10 lakh for studies in India and Rs. 20 lakh for studies abroad and do not include those granted scholarship by the institutions.
Housing loans:Loans upto Rs. 15 lakh for construction of houses by individuals, (excluding loans granted by banks to their own employees) and loans given for repairs to the damaged houses of individuals up to Rs. 1 lakh in rural and semi-urban areas and up to Rs. 2 lakh in urban areas.
Non-Performing Assets (NPAs) in Priority Sector:The aggregate NPAs of public sector banks under priority sector was maximum at Rs.25,150 crore in 2002, accounting for 46.2 per cent of total NPAs. However, in 2004, it declined to Rs.23, 841 crore, though as a percentage to total NPAs, it increased to 47.5 per cent. The share of NPAs under priority sector remained in the range between 44.2 per cent (2001) and 52.5 per cent (1995) of the total NPAs for State Bank of India and its Associates.
NPAs were more in public sector bank group while the least was in foreign bank group, because advances by public sector bank group to the priority sector were also high. NPAs in the public and private sector bank group were high mainly due to increase in NPAs in the agricultural sector. Lending to priority sectors is higher by the public and private sector banks than the foreign banks. Public and private sector banks have achieved the overall target and sub-target but not as much as foreign banks. Non-achievement 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 write-off of nonperforming loans leading to reduction in the outstanding advances in the case of some banks.
MAJOR ISSUES:
Preferences of RBI to priority sector advances have created various issues for the Indian banking industry which need quick attention. These issues are:
Low profitability:
Profitability has been affected by a wide range of factors such as increasing proportion of deposit resources under statutory liquidity pre-emption at lower interest, the shift of savers’ preferences to long-term deposits and the incidence of non-performing assets. Though, banking is not a high profit area in most countries, profitability has been particularly low in India. One of the important reasons for declining profitability of banks has been their increasing involvement in providing mandatory credit entailing rigid target setting and the concessionality.
High NPAs: Persons who borrow from the bank do not repay the loan. This increases non-performing assets of the banks. Thus, priority sector credit has created fear among banks and, discourages them to go slow in disbursement of credit.
Quantitative targets:The concerns for achieving quantitative targets within stipulated time frame irrespective of assessed demand or potential have caused an erosion of the qualitative aspects of lending which have an effect on the viability of the lending institutions.
Government interference:
One of the major problems of bank is that the government interferes in the working of the banks especially in public sector banks. Therefore, loans are delivered in the hands of the rich rather than weaker section of the society.
Transaction cost:Sanctioning and monitoring of large number of small advances is time consuming and manpower intensive, thus adding to the transaction cost. The problem is further compounded by the deficiencies in pre-sanction and bunching of applications at the last moment by the sponsoring agencies in the case of lending under poverty alleviation programmes. These deficiencies have resulted in the lowering of the overall quality of credit and the effectiveness of its delivery.
STRATEGIES:
Recovery of NPAs:
For the recovery of NPAs, banks should follow the following measures:
1) Debt Recovery Tribunal should implement to recover the NPAs;
2) Banks should be very careful in considering settlement compromise proposals;
3) Banks should try to introduce a system of internal audit of sanction of loans before disbursements for large averages.
Rate of interest:Bank should follow the following guidelines of RBI for the rate of interest;
 1) In respect of direct agricultural advances, banks should not compound the interest in the case of current dues, that is crop loans and installments should not fall due in respect of term loans, as the agriculturalist do not have any regular source of income other than sale proceeds of their crops;
 2) When crop loans or installments under term loans become overdue, banks can add interest to the principal;
 3) Where the default is due to genuine reasons, banks should extend the period of loan or reschedule the installments under term loan. Once such a relief has been extended, the over dues become current dues and banks should not compound interest.
Discretionary powers:
All Branch Managers of banks should be vested with discretionary powers to sanction proposals from weaker section without interference of the government.
Qualitative targets:
Bank should fix quantitative as well as qualitative targets so that viability of the banks can increase.
IMPLICATIONS:
The main implication is that although RBI has fixed some targets regarding priority sector advances but many banks are not in position to achieve it. The implicit of the paper is that RBI should carry out strict measures against these banks that are not properly providing priority sector advances. In the era of global recession, our country RBI should redefine priority sector advances.
AREAS OF COMPREHENSIVE FUTURE RESEARCH:
The following topics should be given top priority for future research:
1) Extent of NPAs from different components of priority sector advances;
2) Rural-Urban gap in NPAs from priority sector advances;
3) Priority sector advances and efficiency of banks.

Conclusion:The priority sector advances of all the banking groups are increasing. In spite of increasing advances, Indian banks have not achieved some targets fixed by RBI lending to priority sector.

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