Priority sector lending and non-performing assets: Status, impact & issues

Abstract

Priority sector lending has become an important component of national agenda after the nationalization of banks. Priority sector lending quota for the commercial banks has provided a major tool for allocation of financial resources to agriculture, small scale enterprises and to the schemes for self-employment. According to priority sector standards, scheduled commercial banks have to give 40% of their loans to the identified priority sectors by the RBI directions. sector-wise NPAs of public sector banks for twelve years from 2005 to 2016 depicts that percentage of priority sector NPAs increased from FY 2005 till FY 2011, and it witnessed fall in FY 2012 and it continued to fall till FY 2016. In case of Non-priority sector NPAs, it continued to fall from FY 2005 to 2009 and it was observed to be stable form FY 2009 to FY 2011 and from FY 2011 onwards it continued to increase substantially from 45.85 in FY 2011 to 76.7 in FY 2016. Both Priority Sector and Non-Priority Sector NPAs are contributing total NPAs of public sector banks. Compound growth rate of nationalized and private sector banks for Outstanding Credit to Priority Sector was calculated and found that private sector banks having more credit to priority sector (26.64215). Resetting PSL targets for banks based on their underlying business models will certainly enable them to meet their targets efficiently. However, considering the costs of PSL for banks, credit availability to priority sectors in the long run can be sustained by making these sectors, especially agriculture, attractive for private sector investment and by strengthening specialized financial institutions like RRBs, cooperatives and MFIs to meet the credit needs of these priority sectors and stimulate positive feedback effect on the growth of these sectors.