Priority Sector Lending in India

Topics: Debt, Interest, Bank Pages: 11 (3714 words) Published: December 2, 2010
Definition and more details5
Priority sector: A need5
Priority Sector Target: Financial Reforms Effect6
Effect of reforms on priority sector lending:6
Priority Sector: Specific sector guidelines8
Small enterprises8
Weaker section:9
Other sectors9
Priority Sector: present status10
Participating Entities : Targets to be met10
Participating Entities : How much is achieved11
Public Sector banks11
Private Sector banks11
Foreign banks12
Participating Entities : penalties in case of failure in achieving the target12 Priority Sector : Advantages12
Priority Sector : Major Issues13
Strategies Ahead13
Priority sector bank lending was mainly started by the government to reach the unbanked areas through regular banks which were till that time not much willing to go to rural and undeveloped areas. It was one most important tool in our financial policy to compel banks to increase their loanable customers. Before independence, banks were mostly privately owned and they used to lend only to the sectors in which they were assured of returns. According to the reports from 1940s, 79% of bank finances were made available to industry and commerce. Of that amount too, around 32% went to large industries of jute, cotton and sugar mills. When looking at the less rosy picture, the advances to agriculture sector stood a meager 4%. Post independence, according to RBI survey of 1954, in 1951-52, of all credit disbursal by credit agencies to cultivators, only 7.3 % was from institutional credit agencies. Of this small contribution, the part of banks was only 0.9%. Rest was given by government and cooperative agencies. From this statistics, it is clear that the rest of the credit was availed by the cultivators from non-institutional credit agencies. When the interest rates charged by these agencies was checked, they were found to be usuriously high with professional moneylenders charging 41.9% interest rate while agricultural moneylenders charged 23.9% interest rate which was 5-6 times more than the normal bank rate. It shows that if a farmer is getting loan at this interest rate, chances are more that he will never be able to repay it fully and fall in the vicious circle of loans. By getting working capital at such high interest rates, it was equally difficult to breakeven. So, agriculture and small and medium enterprises were in deep need for credit at easy terms.

Priority sector and its coverage area kept changing all through these years, mostly due to economic and political pressures. Although its definition can be divided in two parts i.e. pre-reform and post reform period. Pre reform period definition: “It included agriculture, Small scale industry (including setting up of industrial estates), small road and water transport operators, small business, retail trade, professional and self employed persons, state sponsored organizations for SC/STs, educational loans granted to individuals by banks under schemes, Credit schemes for weaker sections and refinance by sponsor banks to Regional Rural Banks.” About the post reform definition we will talk later in details when dealing in the section about priority sector guidelines. PRIORITY SECTOR: A NEED

Population support and employment generation: According to the definition of priority sector it covers about 70% of India’s population by rough estimates. So, by making it mandatory for the banks to lend to priority sector, government is actually trying to cover a big part of population. Priority sector mostly includes agriculture and allied sector which employs largest number of people in our country. •Freedom from non-institutional credit: The priority sector cut out by government was mostly the one which was earlier taking loans from non-institutional sources and was always indebted because of usurious rates of interest. By creating...
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