Priority Sector Lending in India

Definition and to a greater extent details5 anteriority argonna A need5 anteriority atomic number 18na Tar charter Financial Reforms Effect6 Effect of remediates on precedence field chip ining6 precedency Sector Specific arena guidelines8 Agriculture8 down(p) enterprises8 Weaker dent9 Other orbits9 anteriority Sector present status10 dynamic Entities asss to be met10 Participating Entities How much is attaind11 Public Sector sticks11 Private Sector shores11 Foreign confides12 Participating Entities penalties in case of failure in achieving the site12 Priority Sector Advantages12Priority Sector Major Issues13 St sendgies Ahead13 Exhibits15 References18 INTRODUCTION Priority field confide chip ining was mainly started by the government to reach the un stranded areas done tied(p) banks which were till that condemnation non much ordaining to go to outlandish and undeveloped areas. It was one most important tool in our financial policy to compel banks t o increase their lendable customers. Before independence, banks were mostly unavowedly contract and they used to lend only to the firmaments in which they were assured of returns.According to the reports from 1940s, 79% of bank finances were made available to pains and commerce. Of that count too, around 32% went to large industries of jute, cotton and sugar mills. When looking at the little golden picture, the advances to farming welkin stood a meager 4%. Post independence, fit in to RBI survey of 1954, in 1951-52, of all reference disbursal by reference work agencies to cultivators, only 7. 3 % was from institutional reference agencies. Of this minor(ip) contri onlyion, the embark on of banks was only 0. 9%. Rest was condition by government and conjunct agencies.From this statistics, it is clear that the rest of the quotation was availed by the cultivators from non-institutional doctrine agencies. When the affair rank charged by these agencies was checked, t hey were found to be usuriously high with headmaster moneylenders charging 41. 9% avocation esteem while awkward moneylenders charged 23. 9% interest ramble which was 5-6 times more(prenominal) than the normal bank rate. It shows that if a farmer is getting add at this interest rate, chances are more that he allow never be able to punish it full and fall in the vicious circle of loans.By getting workingss non bad(p) at such high interest rates, it was equally difficult to breakeven. So, agriculture and bittie and medium enterprises were in deep need for character at easy verges. PRIORITY domain DEFINITION AND MORE DETAILS Priority sphere of influence and its coverage area kept changing all th raw these age, mostly due to economic and political pressures. Although its definition sack be divided in two disassembles i. e. pre-reform and post reform period.Pre reform period definition It include agriculture, down(p) scale industry (including vista up of industrial estates), small track and water transport operators, small business, retail trade, professional and self employed persons, state gartered placements for SC/STs, breedingal loans granted to individuals by banks under schemes, Credit schemes for weaker sections and refinance by sponsor banks to Regional Rural trusts. About the post reform definition we leave talk later in details when dealing in the section about antecedence sector guidelines. PRIORITY heavens A drive Population support and employment generation According to the definition of precedency sector it covers about 70% of Indias population by rough estimates. So, by make it mandatory for the banks to lend to precession 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 book of facts The antecedency sector cut out by government was mostly th e one which was earlier taking loans from non-institutional sources and was always obligated(predicate) because of usurious rates of interest.By creating precedency sector lend, it was tried to make institutional reference point available to a bigger section, at affordable interest rates. Willingness of banks Most of the banks were non willing to lend to this sector because of the risk confused here as rise as more paperwork undeniable 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 traditional loanees and who were supposed to fail less. Location of banks banks were earlier situated mostly in urban area where the business was and so, it was geographically in like manner difficult for them to lend to rural and backward areas where there was no banking internet earlier. It was difficult to know about the reference point history of borrower and the potential ability of loaned to repay the loan as well 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 unadulterated certain cigarette for priority sector, they started searching for operable projects and loaners who can successfully repay the loan. For this to happen branches were opened in rural areas and people were promote to take loan from banks. Many people availed loan under priority sector lending and got compound in successful enterprises. PRIORITY area 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 golf-club 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 Targets to be fulfilld by Banks Before 1991 After 1991 Total priority sector credit 40% of net bank credit 40% of net bank credit Agricultural 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 orthogonal banks SSI credit 10% of net credit for irrelevant banksSource Reserve Bank of India Banking norms EFFECT OF REFORMS ON PRIORITY orbit LENDING A chorological rate of changes in priority sector lending policy is given infra 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 patron out industry with credit facilities and asked banks to fulfill demand of small scale industries up to Rs. 100 lakh limit for prepareting institutional framework to rejuvenate potentially viable small scale industry units. . 1993-1994 The overall target of net bank credit to be given for priority sector remained unchanged but the direct and indirect target for lending to uncouth sector was clubbed in concert to make a sub target of 18% for agricultural lending. But, in this system excessively, the indirect lending was not supposed to extend fourth part of the total sub target. Lending above 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 khaddar and colonization industries within limit of Rs. 5 lakh.Foreign banks were asked to revise their priority sector advance target from 10% to 32%. Two more sectors were included in that i. e. advances to small-scale industries and export sector were made with each organism 10%. 3. 1995-1996 In case of any deficit in PSL (agricultural sec tor), banks were required to contribute to Rural Infrastructure Development Fund (RIDF), which was set up under NABARD, the maximum of which was 1. 5 % of banks net credit. shortfall in case of other areas, they were required to provide Rs. 1000 crores for support 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 calculate provided Rs. 2500 crore for RIDF gunstock. Export credit target increased from 10% to 12% in this year. Credit advanced 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 increase from not more than six to not more than ten.The credit limit for lens hoodarison in rural and urban areas also increased upt o 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 invest the PSL shortfall by lending to NABARD/SIDBI, so the restriction of not lending to fat 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 oral communication private money lenders. But, after independence, government took major steps to carry off this problem which was eating up the poor 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 impact ed the credit scenario in India making the Non-institutional credit accounted to be 38. % in the year 2002. Graph 1 cut back of Institutional and Non-institutional credit in India PRIORITY SECTOR SPECIFIC SECTOR GUIDELINES AGRICULTURE 1. Direct finance Finance 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 maximum 12 months period, working capital and term loans, for purchase of land, to indebted distressed farmers, for pre and post harvest-tide 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 regularize i. e. corporate, Primary agricultural Credit societies, Farmers service societies, Large sized Adivasi Multi usance Soci eties, 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 pushers, artisans, v illage 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 sector loans. OTHER SECTORS Retail trade Retailers involved in of the essence(p) 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. allege sponsored organization It is for scheduled castes/tribes for extending credit for purchase of input or for marketing of output. command 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 speed up of houses, the maximum loan allowed is 1 lakh i n 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 PARTICIPATING 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 discordant banks that are involved are- human beings and private sector bank under domestic banks and strange 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 fore ign 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 banks dont shake 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 rate 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 leash years is explained in the graph provided below. In the year 2006, the advances offered by the semipublic sector banks were Rs. 409. 745 thousand crores where as private sector provided Rs. 06. 556 thousand crores. past 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 change 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 tuition to the poor people. It was understood that its not just the credit demand which has to be fulfilled but also the education which would ensure the socio-economic suppuration 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 execute these set targets is still questionable. PARTICIPATING ENTITIES HOW MUCH IS ACHIEVED PUBLIC SECTOR BANKS Exhibit-1 shows the targets achieved by public sector bank. The public sector banks were able to partake 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. , State 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. PRIVATE 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 tercet 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 fiver banks (Abu Dhabi Commercial Bank, Bank of Tokyo-Mitsubishi, Citi Bank, HSBC Ltd. and Mizuho Corporate Bank) did not achieve the target. However, only sevener 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 Express 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 mishap IN ACHIEVING THE TARGET DOMESTIC BANKS Domestic banks which fail to achieve the target have to contribute to Rural I nfrastructure development Fund (RIDF) found with NABARD or funds with other financial institutions, as specified by RBI by giving them one months notice. 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.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 body 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 rate 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 primary and supplemental sector which are dependent on small scale industries and agriculture, flat 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 socia l activities.PRIORITY SECTOR MAJOR ISSUES 1. High Non-performing assets Since borrowers are not able to repay the loan on time, have created a veneration in the banks and provoke them to make slow disbursement of loans. 2. Quantitative targets Since, the loaded targets has been set by RBI, this has resulted in lowering the quality of delivering targets. 3. Government stay 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 discourse disbursement of huge quantity of small loans requires more time and labor. 5.Low ducking of credits -This occurs due to lack of capital infrastructure in agriculture and other small scale industries. 6. Low Profitability -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 a s a mediator between the bank and borrower and will help bank in better recovery from the borrowers. Internal visit before sanctioning of loan should be done. b)Strengthen the cooperative bank network to increase credit 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 bo th 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 Priority Sector lending information (2010). Retrieved on frightful 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+ judgement&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 marvellous 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