Priority Sector Lending in India

Definition and more details5 precedency sector A expect5 Priority Sector level Financial Reforms Effect6 Effect of reforms on anteriority sector lending6 Priority Sector Specific sector guidelines8 Agriculture8 Small(a) enterprises8 Weaker section9 Other sectors9 Priority Sector ease up status10 Participating Entities Targets to be met10 Participating Entities How much is achieved11 Public Sector marges11 Private Sector money boxs11 Foreign entrusts12 Participating Entities penalties in case of failure in achieving the target12 Priority Sector Advantages12Priority Sector Major Issues13 Strategies Ahead13 Exhibits15 References18 INTRODUCTION Priority sector bank lending was mainly started by the government to reach the unbanked areas through regular banks which were work on that time not much giveing to go to rude and undeveloped areas. It was one most important tool in our financial polity to fetter banks to increase their loanable customers. Before independence, b anks were mostly semiprivately 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 make procurable 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 paltry 4%. Post independence, according to rbi survey of 1954, in 1951-52, of all citation disbursal by reference book agencies to cultivators, only 7. 3 % was from institutional reliance agencies. Of this diminished 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 deferred payment was availed by the cultivators from non-institutional quotation agencies. When the spare-time activity rates aird 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 work 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 arena DEFINITION AND MORE DETAILS Priority sector and its coverage area kept changing all through these years, mostly due to economic and policy- devising pressures. Although its definition arse be divided in two parts i. e. pre-reform and post reform period.Pre reform period definition It included agriculture, Small outstrip industry (including setting up of industrial estates), small road and water transport operators, small business, retail trade, professional and se lf employed persons, state sponsored organizations for SC/STs, nurtureal loans granted to individuals by banks chthonic schemes, Credit schemes for weaker sections and refinance by sponsor banks to Regional Rural strands. About the post reform definition we will talk later in details when dealing in the section about precession sector guidelines. PRIORITY SECTOR A NEED world support and employment generation According to the definition of antecedency sector it covers about 70% of Indias 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 assort sector which employs largest estimate of people in our country. Freedom from non-institutional credit The priority sector cut out by government was mostly the one which was ahead victorious loans from non-institutional sources and was always indebted because of usurious rat es of interest.By creating priority sector lending, it was tried to make institutional credit available to a bigger section, at affordable interest rates. Willingness of banks Most of the banks were not willing to lend to this sector because of the risk have-to doe with here as strong as more paperwork take to lend smaller loans to large number of people. They were happy lending to urban sector which was more reliable and trustworthy. They preferred lending to industry, commerce, trade and securities as their tralatitious loanees and who were supposed to default less. Location of banks blasphemes were earlier situated mostly in urban area where the business was and so, it was geographical recordically also difficult for them to lend to rural and backward areas where there was no banking mesh earlier. It was difficult to know about the credit history of borrower and the po ten-spottial ability of loaned to repay the loan as swell as potential of the project for which loan was to be given. So, they were skeptical about loaning to those sectors. Institutional credit By allowing priority sector credit to flow, RBI and government actually allowed large amount of institutional credit to flow in this area.So, as it became mandatory for the banks to complete certain target for priority sector, they started meddling for viable projects and loaners who can successfully repay the loan. For this to happen branches were opened in rural areas and people were encouraged to take loan from banks. Many people availed loan under priority sector lending and got involved in successful enterprises. PRIORITY SECTOR FINANCIAL REFORMS EFFECT After financial sector reforms, priority sector lending underwent lots of change.As earlier, it was only focused towards weaker and rural section of society but afterwards it included many new sectors as well as the definition of earlier sectors was widened to include more areas in them Priority sector targets are Table 1 Priority Sector T argets to be achieved by Banks Before 1991 After 1991 Total priority sector credit 40% of net bank credit 40% of net bank credit rustic credit 18% of net bank credit 18% of net bank credit Weaker section credit 10% of net bank credit 10% of net bank credit Export credit 12% of net bank credit for foreign banks SSI credit 10% of net credit for foreign banksSource Reserve Bank of India Banking norms EFFECT OF REFORMS ON PRIORITY SECTOR LENDING A chorological sequence of changes in priority sector lending policy is given below which show how the definition of priority sector has changed in all these years 1. 1992-1993 In the light of reforms, and many new industries coming up in all sectors, government and RBI decided to help out industry with credit facilities and asked banks to fulfill demand of small scale industries upto Rs. 100 hundred cat valium limit for setting institutional framework to rejuvenate potentially viable small scale industry units. . 1993-1994 The overall targe t of net bank credit to be given for priority sector remained unchanged but the direct and indirect target for lending to agricultural sector was clubbed together to make a sub target of 18% for agricultural lending. But, in this system also, the indirect lending was not supposed to extend one-fourth of the total sub target. loaning higher up this in indirect lending, was not to be considered in priority sector lending. At least 40% of total credit was supposed to go to small scale and khadi and small town industries within limit of Rs. 5 lakh.Foreign banks were asked to revise their priority sector advance target from 10% to 32%. deuce more sectors were included in that i. e. advances to small-scale industries and export sector were made with each being 10%. 3. 1995-1996 In case of any shortfall in PSL (agricultural sector), banks were required to bring in to Rural Infrastructure Development Fund (RIDF), which was set up under NABARD, the level best of which was 1. 5 % of banks net credit. shortage in case of opposite areas, they were required to provide Rs. 1000 crores for financing in Khadi and Village Industries Commision (KVIC).All the refinances which was done to RRBs by the banks was now to be considered under priority sector lending. 4. 1996-1997 In this year Union Budget provided Rs. 2500 crore for RIDF fund. Export credit target increased from 10% to 12% in this year. Credit go to priority sector increased this year very much. From the last year numbers, it increased from 30. 37% of net bank credit to 32. 4%. 5. 1997-1998 The scope of priority sector lending was increased for road and water transport operators, with number of eligible vehicles increasing from not more than six to not more than ten.The credit limit for housing in rural and urban areas also increased upto Rs. 5 lakh. 6. 1998-1999 In this year, the interest rate subsidy for loan in PSL was taken away on the argument that now priority sector lending is also commercially viable for banks. Banks were also given the option to assign the PSL shortfall by lending to NABARD/SIDBI, so the restriction of not lending to profitable sector was slowly being taken away. 7. 1999-00 Banks were asked to lend to NBFCs and MFIs under priority sector, to enable them to lend to rural and weaker section.INSTITUTIONAL AND NON-INSTITUTIONAL CREDIT IN INDIA Before independence, the credit which was available to farmers was just non-institutional credit or in other words private money lenders. But, after independence, government took major steps to uproot this problem which was eating up the unequal population and was hampering with the countrys economic growth. In 1951, institutional credit accounted to 92. 7% of the total credit availed (Refer Graph-1) where as all these reforms positively impacted the credit scenario in India making the Non-institutional credit accounted to be 38. % in the year 2002. Graph 1 Trend of Institutional and Non-institutional credit in India PRIORITY SECTOR SPECIFIC SECTOR GUIDELINES AGRICULTURE 1. Direct finance pay given to individual farmers (including SHG & JLG) for agricultural and allied activities are included under this sector. This includes short-term loans for raising crops, advances upto 10 lakh against pledge of agricultural produce for level best 12 months period, working capital and term loans, for purchase of land, to indebted distressed farmers, for pre and post harvest activities.Loans given to partnerships, corporate and institutions for agricultural activities, and upto 1 crore for most of the activities mentioned above also come under direct finance. 2. Indirect finance It covers vast range i. e. corporate, Primary agricultural Credit societies, Farmers service societies, Large sized Adivasi Multi social occasion Societies, cooperative societies, and for the construction of warehouse, agricultural input dealers, arthias, NCDC, NBFCs, NGOs, MFIs, RRBs and overdraft upto 25000 for no-frills account in rural and semi-urban areas. SMALL ENTERPRISES 1. Direct finance a.For manufacturing enterprises, for small enterprises the upper cap for taking loans is less than 5 crores, while for micro enterprises it is upto 25 lakh only. b. For service enterprises, for small enterprises it is upto 2 lakh, while for micro enterprises it is only 10 lakh. c. For khadi and village industries it is upto 60% of small enterprise segment. 2. Indirect finance a. It is made available for the person involved in marketing activities of artisans, village and cottage industries. b. Under this Loans made by NABARD, SIDBI and commercial banks to NBFCs and cooperatives involved in this sector also come.WEAKER SECTION In weaker section, small and marginal farmers with less than 5 acres land holding, landless labourers, artisans, village and cootage industries, beneficiaries of SGSY, SC, ST, DRI, SJSRY, SLRS, self help groups, distressed poor, minority communities etc are included. They are given loans under priority s ector loans. OTHER SECTORS Retail trade Retailers involved in essential commodities, consumer co-operative stores, private retail traders, upto the limit of Rs. 20 lakh. Micro-credit For poor indebted borrower of non-institutional credit, it is given against collateral or group security.The upper limit for it is upto Rs. 50000 per borrower. press out sponsored organization It is for scheduled castes/tribes for extending credit for purchase of input or for marketing of output. Education Within India the maximum cap for education loan granted is 10 lakh, while outside India it is 20 lakh. It is applicable for individuals as well as NBFCs. Housing a. For purchase and construction of houses, the maximum loan allowed is 20 lakh. b. For repair of houses, the maximum loan allowed is 1 lakh in rural India and 2 lakh in urban areas. c.For government agencies for construction of dwelling units, or for slum dwellers, upto a maximum of Rs. 5 lakh is allowed. PRIORITY SECTOR PRESENT STATUS f ighting(a) ENTITIES TARGETS TO BE MET The Reserve Bank of India from time to time has issued a number of guidelines/instructions/directives to banks in lending credit to Priority sector. In priority sector diverse banks that are involved are- public and private sector bank under domestic banks and foreign banks. There are separate targets to be met for all the banks which are set by the RBI.RBI issues a master circular containing all the guidelines for incorporation of priority sector lending. If the targets are not met, then various penalties are to be borne by them. The targets set for the domestic and foreign banks working in India are already mentioned before in Table-1. The total advances that a domestic bank has to offer for the priority sector is 40% where as for foreign banks working in India is 32 %. These advances are further bifurcated into the advances provided to agricultural sector, small scale industries (SSI), export credit and weaker sections.However, domestic bank s dont have to contribute to SSI and foreign banks dont have to contribute to agricultural advances and weaker sections. Over the years, the advances provided to this sector are increasing in gross value and some other sectors like education, housing, retail trade which were not the part of this sector previously were also included. The trend observed during the last three years is explained in the graph provided below. In the year 2006, the advances offered by the public sector banks were Rs. 409. 745 thousand crores where as private sector provided Rs. 06. 556 thousand crores. Then in year 2008, these advances increased to Rs. 605. 965 thousand crores and Rs. 165. 225 thousand crores by public and private sector bank respectively. This marked a growth rate of 48% in public sector and 53. 5 % in private sector.Source Reserve Bank of India- Trend and Progress of Indian Banking 2008-09 The share of various sectors i. e. agriculture, SSI, education, housing have also registered a ch ange as shown in the figure given below. The share of advances provided to agriculture sector is more or less same where as the dvances provided to SSI has been replaced by small enterprises, housing and education where housing accounted for 30% of the advances and education accounted for 25% of the advances. Source Reserve Bank of India- Trend and Progress of Indian Banking 2008-09 The rationale of including these sectors was to provide the holistic phylogeny to the poor people. It was understood that its not just the credit requirement which has to be fulfilled but also the education which would ensure the socio-economic development of the society. In all, those sectors which can impact large section of populations are to be a part of priority sector.But, how efficiently are banks able to achieve these set targets is still questionable. combat-ready ENTITIES HOW MUCH IS ACHIEVED PUBLIC SECTOR BANKS Exhibit-1 shows the targets achieved by public sector bank. The public sector ba nks were able to meet the target of 40% till 2005-06 but in 2007 they fell short by 0. 7%. There were 28 banks in total, out of which- seven banks failed to achieve the target (Allahabad Bank, Oriental Bank of Commerce, Syndicate Bank, IDBI Ltd. , introduce Bank of India, State Bank of Mysore and State Bank of Patiala).However, only 8 banks were able to meet target of agricultural lending and only 7 for weaker sections. secluded SECTOR BANKS Exhibit-2 shows the targets achieved by private banks in lending to the priority sector. Out of 26 private sector banks, four banks (Bank of Rajasthan Ltd. , Centurian Bank of Punjab Ltd. , Jammu and Kashmir Bank Ltd. and Karnataka Bank Ltd. ) didnt achieve the target as stipulated for the priority sector lending. However, only three banks were successful in meeting agricultural credit target and no bank met the target for weaker sections. FOREIGN BANKSExhibit-3 shows the targets achieved by foreign banks in lending to the priority sector. Out of 29 foreign banks working in India five banks (Abu Dhabi Commercial Bank, Bank of Tokyo-Mitsubishi, Citi Bank, HSBC Ltd. and Mizuho Corporate Bank) did not achieve the target. However, only Seven banks (Bank of Nova Scotia, Bank of Tokyo-Mitsubishi, Citi Bank, HSBC Ltd. , JP Morgan Chase Bank, Mizuho Corporate Bank and Shinhan Bank) were not able to achieve SSI target and three banks (American take out Bank, Bank International Indonesia and Mizuho Corporate Bank) were not able to achieve the export credit target.The banks which failed to achieve the target have to pay the penalties decided by the RBI. PARTICIPATING ENTITIES PENALTIES IN CASE OF FAILURE IN ACHIEVING THE TARGET DOMESTIC BANKS Domestic banks which fail to achieve the target have to contribute to Rural Infrastructure development Fund (RIDF) established with NABARD or funds with other financial institutions, as condition by RBI by giving them one months notice. The particulars of this fund are decided in the beginni ng of financial year. Interest rate and period of deposit are also to be decided by RBI.FOREIGN BANKS Foreign banks which fail to achieve the target have to contribute to Small Industries Development Bank of India (SIDBI) or funds with other financial institutions, as specified by RBI . The particulars of this fund are decided in the beginning of financial year. Interest rate and period of deposit are also to be decided by RBI. Non-achievement of meeting the priority sector targets are considered while granting regulatory approvals for various purposes. PRIORITY SECTOR ADVANTAGES 1.Financial Inclusion It provided credit availability for small-marginal farmers, and to those sections which were previously deprived of taking any credit from the institutions. 2. Previously because of high default rate amongst the weaker sections,the institutions were reluctant to give credit to those people which forces the farmers or the weaker people to go to the money-lenders who charged them high r ate of interests (varying between 10% to 50%). Mandatory lending to priority sector has eradicated this problem and ensured advances by the institutions. 3.Poverty Alleviation If the timely credit is provided to small households, they can give more inputs to their produces which will result in better productivity. In effect agricultural GDP grows, which helps in upliftment of both the base and secondary sector which are dependent on small scale industries and agriculture, directly or indirectly. It generates more employment, hence, resulting in poverty alleviation. 4. Social Inclusion Poorer sections previously were deprived of participating in various community activities. The rise in their livelihood has given them a strong support to participate in various social activities.PRIORITY SECTOR MAJOR ISSUES 1. High Non-performing assets Since borrowers are not able to repay the loan on time, have created a fear in the banks and get them to make slow disbursement of loans. 2. Qua ntitative targets Since, the stringent targets has been set by RBI, this has resulted in lowering the quality of delivering targets. 3. regime interference Due to the regional Government intervention, the more influential people get the loan, and the poorer still get ignored. So, rich gets more richer. 4. Transaction cost Handling disbursement of huge quantity of small loans requires more time and labor. 5.Low absorption of credits -This occurs due to lack of capital infrastructure in agriculture and other small scale industries. 6. Low advantageousness -Low rate of interest charged from the borrowers makes this sector vulnerable. STRATEGIES AHEAD 1. Initiatives by Government a) Recovery of Non-Performing Assets Establishing Debt-recovery tribunals this will act as a mediator between the bank and borrower and will help bank in better recovery from the borrowers. Internal audit before sanctioning of loan should be done. b)Strengthen the cooperative bank network to increase credi t advances to the farmers. c)Link crop-insurance with loan amount.This mitigates the risk for Lender and borrower. d)Promote group lending to people group lending develops a collective responsibility amongst the borrowers which decreases the default rate. e)Government need to promote rigorous extension activities for promoting modern agricultural techniques for increasing production. f)Strict actions needs to be taken against the banks for not meeting the priority sector criteria. 2. Initiatives by Bank a)Banks should increase the term and delay the installments under term loan in case the borrowers are not able to repay in time. b)They should not charge compound interest on the loan amount.In a nutshell, Government need to strengthen backward and forward linkage both to provide inputs, increase productivity and develop markets. EXHIBITS Exhibit 1 Target achieved by Public Sector banks Exhibit 2 Target achieved by Private Banks Exhibit 3 Target achieved by foreign banksREFERENCES P riority Sector lending information (2010). Retrieved on August 4, 2010 from-http//www. rbi. org. in/scripts/FAQView. aspx? Id=8Trends, issues and strategies (2010). Retrieved on Aug 5, 2010 from-http//www. academicjournals. org/jat/PDF/Pdf2009/December/Uppal. pdfPlanning Commission reports on labour and employment (2010). Retrieved on Aug 5, 2010 from-http//books. google. co. in/books? id=qOOmWsfqfe4C&pg=PA96&lpg=PA96&dq=priority+sector+lending+appraisal&source=bl&ots=HZTEbRCSVo&sig=QtcebyqWJ5xWqkZ_TMdmPzCp4-4&hl=en&ei=KbFaTLK7DISXrAe9u52-DA&sa=X&oi=book_result&ct=result&resnum=9&ved=0CEsQ6AEwCAv=onepage&q&f=falseAll India Debt and Investment Surveys (2002). Retrieved on August 6 ,2010 from- http//www. rbi. org. in/scripts/BS_SpeechesView. aspx? Id=298Trend and Progress of Indian Banking 2008-09 (2009). Retrieved on August 6, 2010 from- http//www. rbi. org. in/scripts/AnnualPublications. aspx? head=Trend%20and%20Progress%20of%20Banking%20in%20India