Priority Sector Lending

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The Draft Technical Paper on Review of Priority Sector Lending, prepared by the Internal Working Group set up in Reserve Bank under the chairmanship of Shri C. S. Murthy, Chief General Manager-in-Charge, Rural Planning and Credit Department, was placed on the RBI website on September 30, 2005 for public opinion. Subsequently, on November 8, 2005 one subparagraph has been added under paragraph 6.10 of the Technical Paper.

DRAFT TECHNICAL PAPER BY THE INTERNAL WORKING GROUP ON PRIORITY SECTOR LENDING

This Draft Technical paper does not necessarily reflect the views of Reserve Bank of India

SEPTEMBER 2005

RESERVE BANK OF INDIA RURAL PLANNING AND CREDIT DEPARTMENT CENTRAL OFFICE MUMBAI

CONTENTS
Sr. No. 1 Section 1 Introductory Particulars

2

Section 2

Directed Lending: International Experience

3

Section 3

Genesis and evolution of Priority Sector in India

4

Section 4

An Analysis of Trends in Priority Sector Lending by banks in India

5

Section 5

Priority Sector Lending and Inter-Bank Participation Certificates

6

Section 6

Review of Priority Sector Lending Policy 7

Section 7

Summary of Options

8

Annexure 1

Recommendations of Earlier Committees and Action Taken

9

Annexure 2

Classification of Priority Sector Advances

10

Annexure 3

Scheduled Commercial Banks’ Advances Under Priority Sector

11

Annexure 4

Outstanding Advances of Scheduled Commercial Banks to Agriculture Scheduled Commercial Banks Advances to Small Scale Industries, Industrial Estates and Road and Water Transport Operators Advances to the Priority Sector by Public Sector Banks

12

Annexure 5

13

Annexure 6

14

Annexure 7

Advances to the Priority Sector by Indian Private Sector Banks

15

Annexure 8

Advances to the Priority Sector by Foreign Banks

16

Annexure 9

Scheduled Commercial Banks Advances under Priority Sector : 2002 and 2003

17

Annexure 10

Composition of NPAs of Public Sector Banks : 1995 to 2004 (As on March 31 of the year)

18

Annexure 11

Proposed classification of priority sector advances

SECTION 1

INTRODUCTORY

1.1

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 emphasised 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 formalised 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 a modified return for reporting priority sector advances and certain guidelines were issued in this connection 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.

1.2.

The scope and extent of priority sector has undergone several changes since then with

several new areas and sectors being brought within the purview of this sector. While there has been continuous demand to include new areas such as infrastructure within the ambit of priority sector, there have also been suggestions that the focus on the needy sectors of economy and weaker sections of the society is getting lost because of such inclusions. A need has therefore, been felt to review the concept and the segments of priority sector. Consequently, in paragraph 89 of the Annual Policy Statement of Reserve Bank of India for the year 2005-06, it was stated that prescriptions...
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