PRIORITY SECTOR LENDING BY COMMERCIAL BANKS

A Review of Priority Sector Lending by Commercial				agriculture constituted 15.4 per cent of NBC of PSBs
Banks in India Introduction To The Study				as on the last reporting Friday of March 2003. The
Availability of cheap and adequate credit is a boon for				share of advances to other priority sectors in NBC of
the Economic Development of a country. By providing				PSBs increased to 17.0 percent in 2003-04 from 15 per
credit to farmers, industries, traders and businessmen				cent in 2002-03. The number of accounts covered
the economic progress can be achieved. The banking				under various major segments of priority sector
system can influence economic growth by enhancing				declined over the period.
resources in the direction of national objectives and				Table
priorities.				PRIORITY SECTOR ADVANCES
The banks play a very crucial role in the process of				(Rupees in crores)
economic development and so the availability of				Month and Year
banking infrastructure is considered as one of the				Public Sector Banks
prerequisites for rapid and balanced development of				Private Sector Banks
the country. The banks in India have an important				Foreign Banks
responsibility of chanalizing the funds with most				March 1998
important sectors to fulfill the predetermined objectives.				91,319
There is a rapid expansion in banking, deposit				(41.9)
mobilization and credit development due to which there				11,614
is change in the scope of banking operations.				(40.9)
Lending To Priority Sectors By Commercial Banks				6,940
The concept of priority sector was evolved in the late				(34.3)
sixties in order to focus attention on the need to				March 1999
ensure adequate credit facilities to certain neglected				1,07,200
sectors of the economy particularly in the rural areas.				(43.5)
The involvement of banks in priority sector lending has				14,295
grown considerably with special emphasis on opening				(41.3)
branches in un-banked areas.				8,270
With a view to ensure flow of credit to the neglected				(37.1)
sectors like agriculture and small scale industries, the				March 2000
concept of priority sector lending was evolved and				1,27,807
commercial banks were advised to grant at least 40				(43.6)
percent of their total advances to priority sector				18,348
comprising of agriculture, small scale industries, small				(39.4)
road and transport operators, retail trade, small				9,699
business, professional and self employed persons,				(34.5)
education which stood at 14 percent of the total				March 2001
advances in 1969, increased to 46 percent as at the				1,46,546
end of 1988. And the percentage of advances to				(43.0)
priority sector was 35 during 1997.				21,550
Side by side with the expansion of bank deposits,				(38.1)
there has been continued expansion of bank credit				11,835
reflecting the rapid expansion of industrial and				(34.1)
agricultural output. The banks are also meeting the				March 2002
credit requirements of industry, trade and agriculture on				1,71,185
a much larger scale than before, just as bank deposits				(43.1)
have expanded, bank credit too has expanded				21,530
tremendously particularly since July 1969, from about				(38.8)
Rs.4,700 crorers in 1970-71 to Rs.7,25,370 crorers				13,414
during 2002-2003.				(34.2)
In recent years, bank credit has picked up smartly by				Source: Report on currency and Finance, 2002.
around 20 to 21 percent per year and many factors				Note: 1. Figure in brackets are percentage shares in net
have contributed to this:				bank credit in the respective groups.
1. 1. Increase in credit facilities by commercial banks				1. 2. The target for aggregate advances to the priority
results in large reduction in reserve requirements (CRR				sector is 40 per cent of the net bank credit for
SLR); 2. Release of impounded cash balances under				domestic banks and 32percent of net bank credit for
incremental cash reserve ration (ICRR); 3.Sharp				the foreign banks.
increase in food credit mainly due to increased food				Chart
procurement operation; 4.Increased demand for credit				Share of Advances of Priority Sector
from public undertakings and the large increase in				Advances and its Segments (Public Sector Banks)
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.				Private Sector Banks
Soon after nationalization, the commercial banks were				Private sector banks’ lending to priority sector
asked to be specially concerned with the financing of				as a percentage of their NBC has been showing an
priority sector of agriculture, small scale industry and				increasing trend. The share of their advances to
business and small transport operators, In course of				priority sector in NBC had increased from 44.4 per
time, other priority sectors were also added, such as				cent in 2002-03 to 47.4 percent in 2003-04. During the
retail trade, professional and self-employed persons,				period from 1997 to 2004, average annual growth rate
education, housing loans for weaker sections and				of priority sector advances of private sector banks
consumption loans.				was 29.5 per cent which was mainly contributed by
The rationale of priority sector lending was one of the				the growth in lending to other priority sectors (44.7 per
causes for nationalization of the top 14 banks in 1969.				cent) and agriculture (37.4 per cent). In comparison, the
However, it was the Working Group on the Priority				average annual growth rate for advances to SSI was
Sector Lending and the 20 Point Economic				at 8.4 per cent. In absolute terms, credit to agriculture,
Programme chaired by Dr.K.S.Krishnaswami which				SSI and other priority sectors had increased.
clearly spelt out the concept:				The share of credit to other priority sector category
The concept of Priority Sector Lending is mainly				was the highest at 23.1 per cent of NBC, followed by
intended to ensure that assistance from banking				advances to agriculture and SSI. The lending of private
system should flows in an increasing manner to those				sector banks to agriculture sector had increased to
sectors of the economy which though accounting for				12.3 per cent of their net bank credit in 2003-04, higher
a significant proportion of the national product have not				by 1.1 per cent over that in 2002-03. The respective
received adequate support of institutional finance in the				shares of credit to agriculture, SSI and other priority
past”.				sectors in total priority sector advances of private
The different segments of the priority sector are as				sector banks over the period from 1996 to 2004 are
follows:				presented in chart I.4.
1. Agriculture				Chart
2. Small Scale Industries				Share of Advances to Priority Sector and its
3. Small Road and Water Transport Operators				Segments
4. Retail Trade				(Private Sector Banks)
5. Small Business
6. Professional and Self-employed persons				Advances to Weaker Sections
7. Education				As against the target of 10 per cent of NBC,
8. Housing Finance				achievement in purveying credit to weaker sections by
The Reserve Bank of India issued certain directives to				PSBs was to the extent of around 7 per cent during
the commercial banks regarding Priority Sector				2001 to 2004. In the case of private sector banks, the
Lending. Priority Sector Advances should constitute 40				achievement, which varied between 1.70 per cent in
percent of aggregate bank credit. Out of priority				the year 2001 and 1.34 per cent in 2004, had fallen
sector advances at least 40 percent should be				short of the target considerably.
allocated to agriculture. Direct advances to the weaker				Table
sections in agriculture and allied activities in rural area
should form at least 50 percent of the total direct				Advances to Weaker Sections
lending to agriculture. Bank credit to rural artisans village
and cottage industries should at least be 12.5 percent				As on Last Friday of March
of the total advances to small-scale industries. About				Public Sector Banks
12 percent of bank credit should go to exporters. The				Private Sector Banks
commercial banking system and particularly the public
sector banks under the influence of the finance				Amount
ministry and the ruling party politicians took to priority				(Rs. Crore)
lending enthusiastically.				% of NBC
The total credit extended by the public sector banks to				% NPA
agriculture, small-scale industry and other priority				Amount (Rs. Crore)
sectors went up from Rs.440 crores in June, 1969 to				% of NBC
Rs.1.71,190 crores in March 2002. As a result, advances				% NPA
to priority sectors as percentage of total credit				1
increased from 15 percent in June 1969 to 43 percent				2
in March 2002. The rate of progress was quite rapid				3
soon after nationalization but later progress was more				4
modest. The relatively slow progress of advances to				5
the priority sectors was due to the fact that the bank				6
officials from top to bottom were not imbued with the				7
new objectives of banking. At the same time banks				2001
were also worried at the poor and unsatisfactory				24805.33
recovery performance of the agricultural and small				7.28
sectors.				22.51
Table				958.94
PUBLIC SECTOR BANKS’ ADVANCES TO				1.70
PRIORITY SECTORS:				19.72
AMOUNT OUTSTANDING (Rupees in Crores)				2002
Priority Sector				28974.90
June 1960				7.30
June 1971				21.71
June 2002				1142.06
March 2004				1.82
Agriculture				10.30
160				2003
340				32303.75
63,080				6.76
90,540				19.39
S.S.I				1223.40
260				1.48
440				16.78
49,740				2004
65,850				41588.64
Other Priority Sector				7.44
20				18.90
130				1495.49
53,710				1.34
1,07,440				12.15
Total P.S Advances				Source: Report on Trend and Progress of Banking In
440				India
910
1,71,190				Advances Under Differential Rate of Interest (DRI)
2,63,830				Scheme
Total bank credit
3,020				The scheduled commercial banks are required to
4,080				extend advance under DRI Scheme to the weakest
3,96,950				of the weaker sections at a rate of interest of 4.0 per
7,64,380				cent. A target of 1.00 per cent of outstanding amount
Percentage of Priority Sector Advances to total bank				of bank credit as at the end of Matrch of previous
credit				year has been fixed under DRI scheme. As against
12				this, the public sector banks had attained a level of only
25				0.07 per cent as at the end the year 2004. The
43				achievement, in percentage terms, had been declining
34				persistently over the period. The number of
Source :- RBI Annual Report 2003 – 04				beneficiaries and outstanding amount of loans have
The priority sector advances include small transport				also declined over the years. However, the amount
operators, self-employed persons, rural artisans etc.,				outstanding increased marginally in 2004.
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,				Table
there was external pressure too on the banking sector				Advances of Public Sector Banks under DRI Scheme
to lend to weaker sections.				As on Last Friday of March
As priority sector loans were small accounts, public				No.of Accounts in Lakhs
sector banks were not able to monitor the distribution,				Amounts outstanding (Rs. In Crore)
follow-up and recovery of tiny loans. This increased				Total Bank Credit (Rs. In Crore)
their costs on the one side and aversely affected their				DRI Advances as a % of Total Bank Credit
profitability, on the other. The commercial banks were				1
squeezed in both ways. On the other hand, they were				2
forced to keep a high proportion of their deposits as				3
much as 53.3 to 55 percent in liquid reserves till 1992				4
under CRR (15%) and SLR provisions (38.5%). They				5
had, therefore, only about 45 percent of the deposit				1995
resources for loans and advances.				19.47
Even out of these limited 45 percent deposit				683
resources, banks were to allocate 40 percent of their				138648
available resources, as loan to the priority sector. What				0.49
was still worse was that much of the priority sector				1996
lending has to be at a low concessional rate of				15.52
interest. The result was that the banking sector was				678
unable to satisfy the credit requirements of other				165377
sectors. At the same time, their profitability was				0.41
squeezed badly and most of the banks incurred huge				1997
losses.				14.30
The bank lending to priority sector was not uniform in				655
all states. Actually, it was quite low in many backward				193963
states like UP, Bihar, Rajasthan etc. In order to attain				0.34
40 percent of the target for the country as a whole,				1998
the banks were stepping up their loans to the priority				9.05
sector in the more advanced states. This further				544
worsened the regional imbalance in the country.				197186
The Narasimhan Committee on the financial system,				0.28
1991 was against the continuance of the priority sector				1999
lending. The Committee recommended to redefine the				7.29
priority sector as follows. It should be fixed at 10				485
percent of the aggregate bank credit. It should be				233852
reviewed after a period of three years. It should be				0.21
completely phased out gradually. The government of				2000
India did not accept this recommendation. How ere, the				5.90
panel of bankers constituted by the Indian				422
Banks’ Association suggested to the				265554
Narasimhan Committee on Banking Sector Reforms				0.16
(1998) that the present priority sector credit limit of 40				2001
percent of the net bank credit should be slashed to 10				5.14
percent primarily for three reasons. Operating expense				358
for small loans was very high due to deployment of				316446
large number of field staff. Success of recovery				0.11
process was very low in agriculture and small scale				2002
sector, and Quality of assets was bad as there were				NA
too many risk factors.				NA
1. The government extending subsidies directly to the				341292
banks instead of routing them through intermediaries.				NA
The bankers’ panel also suggested that the				2003
interest rate on priority sector lending should be				3.70
deregulated and the banks be allowed to fix their own				299
rate of interest depending on the cost of funds, risk				396953
cost, administration and transaction costs and profit				0.08
margin. The panel argued that the identified priority				2004
sectors would not be starved of credit as banks				3.68
would service them according to their expertise by				315
lending at market-related interest rates.				477899
In order to speed up recovery from the priority sector				0.07
borrowers, the panel suggested that the disbursement				Source: Statistical Tables Relating to Banks in India
target for various branches at the state and district
levels should be linked to the percentage of recovery.
The panel has called for setting up a debt recovery
tribunal for small loans and adequate legal support for				Bank –wise Frequency Distribution of Targets
recovery of assets. Banks should also be empowered				and Achievements
to take over assets in case of default.
Side by side with the expansion of bank deposits,				The frequency distribution in various ranges of
there has been continued expansion of bank credit				achieving the target for priority sector advances as a
reflecting the rapid expansion of industrial and				percentage to NBC as on March 2004 is given in the
agricultural output. The banks are also meeting the				following table. Out of 27 public sector banks, only nine
credit requirements of industry, trade and agriculture on				banks achieved the target of 18 per cent relating to
a much large scale than before, just as bank deposits				credit to agriculture. Among private sector banks, only
have expanded, bank credit too has expanded				11 out of 30 banks had attained the target. As regards
tremendously particularly sine July 1969, from about				the achievement of target in respect of credit to
Rs.4,700 corers in 1970-71 to 10,92,890 corers during				weaker section (10 per cent) seven public sector
2004 - 05.An Analysis Of Trends In Priority Sector				banks achieved the target as compared to 4 banks in
Lending By Banks In India				the private sector.
Here, the trends in advances to priority sector and its
various segments, bank-group wise achievements in
priority sectors, activity-wise credit to various
segments and its sub-segments, credit to weaker
sections and credit extended under differential rate of
interest scheme has been presented. Further, the
performance of banks in lending to priority sector and
the targets set for them also have been analyzed.
Growth of Priority Sector Advances of Commercial
Banks Excluding RRBs.

1. The details relating to growth rates of priority sector				Table 1.5
advances and bank credit are given in the following				Frequency Distribution of lending of Indian Scheduled
table.				Commercial Banks to Agriculture, Weaker Sections
				and
Chart				Priority Sector Advances as a Percentage to NBC
Growth Rate of Outstanding advances to priority				Agriculture as % NBC - 2004
sector and Bank credit and share of PS advances to
Bank Credit				<12%
				12-15%
				15-18%
				>18
				Total Banks
				% NBC
				Public sector Banks
				3
				6
				9
				9
				27
A segment – wise analysis of credit extended				% Share of Agriculture Credit
by scheduled commercial banks to various segments				4.2
of priority sector is presented hereunder.				36.4
Credit to Agriculture				26.2
				33.3
The number of accounts covered under agriculture in				100
priority sector declined from 2.03 crore in 1995 to 1.99				15.41
crore in 2004. However, outstanding advances to				Private Sector Banks
agriculture had increased substantially during the period				15
from Rs,24,200 crore to Rs.99,302 crore, registering an				3
average annual growth rate of 16.6 per cent. Out				1
standing advances to agriculture as a percentage of				11
Net Bank Credit had recorded a negligible increase				30
from 11.4 per cent as at the end of 1995 to 11.5 as at				% Share of Agriculture Credit
the end of 2004.				16.2
The average annual growth of direct finance to				5.2
agriculture was lower at 13.9 per cent during				1.3
1995-2004. The share of direct finance to agriculture in				77.1
total agricultural credit declined from 88.2 per cent in				100
1995 to 71.3 per cent in 2004. Direct finance to				15.81
agriculture as a percentage of NBC had also declined				Weaker Sections as % NBC
from 10.1 per cent to 8.2 per cent during the above
period.				<5%
The share of credit for distribution of fertilizers and				5-7%
other inputs which was at 2.2 per cent in 1995				7-10%
increased to 4.2 per cent in 2004. The shares of other				>10
types of indirect finance to agriculture to total				Total Banks
agriculture credit increased significantly from 4.8 per				%NBC
cent to 21.0 per cent during the said period. As a				Public sector Banks
percentage of NBC, other types of indirect finance to				8
agriculture increased from 0.6 per cent to 2.4 per cent.				7
Indirect credit to agriculture provided by banks,				5
comprising of finance for distribution of fertilizers and				7
other inputs and other types of indirect finance, grew				27
at a rate of 30.8 per cent during the corresponding				% Share of Weaker Sections
period[1].				9.6
It would be observed that the share of indirect credit				16.9
to agriculture in total agriculture credit increased from				41.4
11.8 per cent in March 1995 to 28.7 per cent in March				30.1
2004 despite the fact that indirect agriculture				100
advances are reckoned only to the extent of 4.5 per				7.44
cent while measuring the performance of banks in				Private Sector Banks
achieving the target of 18 per cent of NBC in				25
agriculture. As a percentage of NBC, indirect credit to				0
agriculture increased from 1.4 per cent to 3.3 percent				1
during the above said period.				4
Chart				30
Percentage Share of Constituents of Agriculture				% Share of Weaker Sections
Credit to				50.3
Total Agricultural Credit				0
				1401
				35.6
Credit to Small-Scale Industries, Setting up of Industrial				100
Estates and Small Road and Water Transport				1.34
Operators.				Priority Sector Advances
1. Such loans as a percentage of NBC were at a
negligible level.				<40%
The average annual growth rate of advances to				40-44%
Road and Water Transport operators was at 12.7 per				44-48%
cent during 1995-2004 with per account outstanding				>48
amount at Rs.0.41 lakhs in 1995 visa-vis Rs.1.40 lakh in				Total Banks
2004 Loans to Road and Water Transport Operators				%NBC
as a percentage of NBC declined marginally from 1.4				Public Sector Banks
per cent to 1.0 per cent. The significant feature				2
observed in this regard is the decline in the number of				9
accounts in SSI and other sub sectors over the period,				10
while the amount outstanding increased. This shows				6
that enhanced credit limits were granted to such units				27
to meet their requirements.				% Share of Priority Sector
Bank Group –wise Credit to Priority Sector				22.3
Public Sector Banks (PSBs)				24.5
				29.2
The outstanding priority sector advances of PSBs				24
increased by 21 percent in 2003-04 as against an				100
increase of 18.6 per cent during 2002-03 . During the				43.94
period 1995-2004, the average annual growth rate of				Private Sector Banks
advances to priority sector by public sector banks				12
was 17.6 per cent as compared to average growth				2
rate of NBC at 16.7 per cent in the same period. The				2
higher growth in priority sector advances of PSBs				14
during the above period was primarily due to 28.8 per				30
cent average growth rate recorded by other priority				% Share of Priority Sector
sectors which compensated for the low average				10.7
growth rate in credit to SSI (9.3 per cent) and direct				8.8
agriculture credit (15.7 per cent). The share of priority				8.3
sector advances in NBC of PSBs increased to 44 per				72.1
cent in 2003-04 from 42.5 per cent in 2002-03. The				100
growth in priority sector advances of PSBs was				47.35
fuelled by the surge in the loans and advances to				Source: Statistical Tables Relating to Banks in India
various other priority sectors and robust growth of				[1]. M.
credit to the agriculture sector (Chart 3). Advances to

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PRIORITY SECTOR LENDING BY COMMERCIAL BANKS