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Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
57
SECTORWISE PRIORITY SECTOR ADVANCES IN INDIA
Najmi Shabbir*
ABSTRACT
The present paper mainly analyses the breakup of Priority Sector Advances to Sub-sectors within the
overall Priority Sector advances (PSA) After nationalisation of the Banks directed lending to certain
sectors, such as, Agriculture, Small Scale Industries and weaker section and others, collectively known as
Priority Sector was emphasized. Under this Sectoral and Sub-sectoral targets have been laid down from
time to time, with the aim of upliftment of these sectors and to bring about a balanced development of the
country. The comparative analysis of Agricultural Sector advances and Small Scale Industries advances
by SCBs and PSBs (Public Sector Banks) from 1969 to 2011 has been carried out to find out that whether
Public Banks or Private Banks, who has provided more credit to Priority Sector and whether Banks has
achieved their sectoral targets regarding Priority Sector Advances over the period of time or not and if
not then what are the reasons for non achievement of targets.
Key Words: Priority Sector Advances, Agriculture, Small Scale Industries, Sub-sectors, Micro and Small
Enterprises, Nationalisation.
1. Introduction
When the concept of priority sector was
created, a group of economic activities were
classified as priority sectors. Over a period of
time there have been changes in these sub
categories. In 1967-68 agriculture, exports and
small scale industries were classified as Priority
Sectors
In 1972, DRI scheme was also
introduced under which one percent of the
advances were to be given at a very
concessional rate of interest.
In 1980, it was decided that 40 percent
of PSA should be earmarked for agriculture
advances and direct advances to weaker sections
should reach a level of at least 50 percent of
direct lending to agriculture. It was further
decided that advances to rural artisans, village
craftsmen and cottage industries should
constitute 12.5 percent of total advances to SSI.
In February 1983, the scope of Priority Sector
was further widened to include in Priority
sector- Agriculture (Direct and Indirect finance),
SSI, small road and Water Transport Operators,
retail trade, small business, Professional and
Self employed persons, State Sponsored Scheme
for SC/ST, education, Housing and
Consumption. Targets, sub targets and inclusion
of new activities under the priority sector for
different categories of banks have been
reviewed and revised periodically.
2. Literature Review
Joshi (1972) has suggested to RBI to
give clear & specific definition of the different
components of priority sector as some of the
bankers are not clear about the scope of
agricultural lending.1The Working Group on the
Modalities of Implementation of the Priority
Sector Lending recommended that out of the
advances to priority sector, at least 40 per cent
should be extended to agriculture sector by each
bank. It also specified that out of total direct
lendings under agriculture; at least 50 per cent
should be to the weaker sections (small and
marginal farmers and landless labourers and
persons engaged in allied activities with
borrowal limts not exceeding Rs 10,000).
Housing loans upto Rs 5000 for construction of
houses for SC/ST and weaker sections,
assistance to any governmental agency for
construction of houses for SC/ST and low-
income groups (where loan component does not
exceed Rs 5000 per unit) and pure consumption
loans granted under the Consumption Credit
Scheme was recommended for inclusion in
priority sector. It also recommended that
decision to increase the share of priority sector
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
58
targets for public sector banks, should be
applicable for private banks in the same way.2
The working Group on the Role of
Banks suggested that the existing target of 40
per cent of total credit to priority sector should
remain unchanged. The Group suggested a
target of 14 per cent of total bank credit for
direct finance to agriculture and allied activities
against the existing target of 16 per cent for both
direct and indirect finance. It suggested that
definition of weaker sections should include
artisans, village and cottage industries and
beneficiaries of IRDP and DRI scheme and
SCs/STs and advances to weaker sections
should account for 25 per cent of priority sector
lending by March 1985.3Angadi (1983) analyses
that because of rapid branch expansion, deposit
mobilization, privileged cropped area, and
adoption of high yielding variety, the
concentration of PSL and agriculture advances
is more in some states.4 Joshi (1986) identified
weak fund management capacity of banks due to
SLR, CRR & PSL .He found that the low yield
rate & rising cost contributed a lot to the
declining trend in profitability of banks.5
Singh
(1987) identified many exogenous and
endogenous factors contributed a lot to the
declining trend in profitability of banks.
Continuous increase in the SLR, CRR, emphasis
on social goals, growing incidence of industrial
sickness, rapid branch expansion in under
banked areas are the factors responsible for low
profitability of banks.6 Muhammad Yunus
(1988) identified that instead of blaming the
defaulters the emphasis should be on proper
loan recovery mechanism.7Chawala (1988) in
his book has revealed that the pace of PSL of
commercial banks has received impetus since
nationalization. As per the analysis of 20 states,
the aggregate PSA in Punjab went up more than
40 times during 1969-80. During the same
period total credit in the state rose eleven times.
The growth rate during the reference period
turned out to be 40.16 percent p.a. The
comparative position of Punjab state in the P.S.
vis-à-vis other states in Indian union were fairly
good. The percent share of Priority Sector
Advances to total advances in Punjab was the
third highest, the first two being Jammu &
Kashmir and Haryana in India. In 1980, Punjab
relative position continued to be the same.
Lending to Priority Sector in Punjab has got an
important place since nationalization of 14
commercial banks. It has continued to grow at a
fast rate even after crossing the target of 40
percent.
Sector-wise growth of commercial
banks credit to Priority Sector revealed that
bank credit to various constituents of Priority
Sector during 1972-82 in Punjab grew
significantly, but among all the constituents of
Priority sectors like agriculture, the self
employed and professional and transport
operators grew faster than sectors like small
industry and retail trade. During the study period
the advances to agriculture and allied activities
grew almost 37 times and those to the transport
operators 54 times. Although advances to small
scale industries grew 6.5 times only, this was
slightly better than the growth of advances to the
total industrial sector which was only five
times.8 Rangarajan (1991) efficiency of banking
system can be improved with the improvement
in the quality of loan assets.9
The Narasimham committee (1991) has
suggested that the priority sector should be
redefined. It proposed that priority sector should
be redefined to comprise the small and marginal
farmer, the tiny sector of industry, small
business and transport operators, village and
cottage industries, rural artisans and other
weaker sections and priority sector should be 10
per cent of aggregate credit. The Narsimham
committee 1991 on financial sector reform has
drawn attention to the problem of low and
declining profitability and stated that there is
need for gradual phasing out of the directed
credit programme, i.e. the target of 40 percent of
all credit to priority sector should be stopped.10
Rajagopal (1994) suggested that concessional
credit or low rate of interest should be restricted
only to the poorest of the poor and to the
underprivileged sections of the society and
recommended that commercial rate of interest
should be charged from those who can afford
it.11
The committee of Gupta had analysed that
the target of 18 percent for lending to agriculture
was fixed when the reserve requirements were
63 percent but the total lendable resources of
banks have increased due to progressive
reduction of the reserve requirements over the
years. The committee suggested that to maintain
the same share, the banks have to double their
lending to agriculture because the base on which
the target of 18 percent was calculated had
doubled. The committee further analysed that
the system of fixing targets on outstanding had
its drawbacks; outstanding decrease with
improved recoveries, as was the case between
1991 and 1995, when recoveries went up from
48.8 per cent to 59.5 per cent.. The committee
suggested that banks should set targets for
themselves for agricultural lending based on the
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
59
flow of credit. They needed to prepare Special
Agricultural Credit Plans (SACPs), with
Reserve Bank indicating every year the expected
increase in the flow of credit over the previous
year. The committee felt that once such plans
were put in place, the 18 percent target based on
outstandings would cease to have much
relevance.12
Patel (1996) in his paper realized
that without strengthening the hold of
commercial banks in the backward & neglected
areas, economic development & the balanced
development were not possible.13
Kohli (1997)
has suggested that inspite of the fact that
directed credit programme for PSL is effective
in India; support to small scale units is
required.14
Ajit (1997) examined the issue of
para banking activities & suggested that bank
should be allowed to undertake these activities,
particularly use of capital as risk, from the
experience of other countries like USA.15
The Narasimham committee (1998)
observed that directed credit had led to an
increase in non- performing loans and had
adversely the efficiency and profitability of
banks. It was observed that 47 percent of all
Non performing assets have come from the
priority sector. At the same time, the committee
also accepted that a sudden reduction of priority
Sector targets could have the danger of a
disruption in the flow of credit to these sectors.
In its report, the committee recognized that the
small and marginal farmers and the tiny sector
of industry and small businesses have problems
with regard to obtaining credit and some
earmarking may be necessary for this sector.
Under the present dispensation, within the
priority sector, 10 percent of net bank credit is
earmarked for lending to weaker sections.
The Committee recommended that
given the special needs of this sector, the current
practice may continue. The Committee also
proposed that given the importance and needs of
employment oriented sectors (like food
processing and related service activities in
agriculture, fisheries, poultry and dairying),
these sectors should also be covered under the
scope of priority sector lending. It, however,
recommended for the removal of concessional
rates of interest on loans up to Rs 2 lakh and a
phased moving away from overall priority sector
targets and sub-sector targets. Debt
securitisation concept was suggested within the
priority sector. This would enable banks, which
are not able to reach the priority sector target, to
purchase the debt from other institutions.16
Department of Banking supervision
(1999) studied the impact of priority Sector
advances on Non performing assets (NPAs) and
found that NPAs in priority Sector is much
higher.17
Puhazhendhi and Jayaraman (1999)
argued that accelerating the pace of capital
formation in public sector, remunerative prices
for agricultural produce, infrastructure
development with focus on transportation,
marketing and other post-harvest facilities etc.
would enable the rural sector to absorb more
credit from institutional sources. It also feels
that ensuring credit discipline through a ban on
loan waiver would help in effective recycling of
funds and creating a conducive environment for
lending.18
The technical group on computation
of Priority Sector lending recommended that the
PSL targets could be linked to the previous
year’s net bank credit and upscale by the
estimated growth in credit during the year. The
technical group also recommended withdrawal
in a phased manner of the facility of exclusion
of FCNR (B)/NRNR deposits from NBC for
computation of priority sector lending targets.19
Vyas committee (2001) observed that
commercial Banks seem to have shied in
extending rural credit as they are dealing vast
number of small accounts. The Committee
recommended that the mandated rates of 18 per
cent of credit outstanding for agricultural loans
and 40 per cent for priority sector loans should
be reviewed after five years. It also
recommended a substantial reduction in RIDF
interest rates to cover the interest cost of
deposits. The committee suggested retaining the
upper limit of 4.5 per cent on indirect credit
while reckoning the achievement of 18 per cent
target for agricultural lending.20
Dr. Y.V. Reddy (February 3, 2001),
Deputy Governor of RBI, remarked that the
flow of credit to priority Sector/rural areas has
not been up to the mark due to accumulation of
losses in public Sector Banks on account of high
NPAs.21
Niranjana & Anbumami (2002)
analyses that due to highly subsidised lending
rates, there is curiosity among the Bankers that
the advances to Priority Sector resulted in a loss
of interest income.22
Shete (2002) analyses that
PSBs are not able to reach the prescribed target
of lending to Priority Sector during the post
reform years.23
3. Hypotheses:
H1: The willingness of the banks to lend to
priority sector is increasing over a period of
time.
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
60
H2:
Banks prefer to lend through indirect
means rather than directly to the borrowers
to reduce risk.
4. Present Categorisation of Priority
Sector Advances
Presently the advances to following sub
sectors are included into priority sector advances
by the banks.24
1. Agriculture
2. Small scale Industries (SSIs)
3. Micro and small enterprises.
4. Setting up of Industrial estates.
5. Small road and water transport
operators.
6. Retail trade
7. Small Business
8. Professional and self employed
persons.
9. Micro credit
10. Education
11. Consumption
12. State sponsored
Corporation/organisations for on
lending to other priority sectors.
13. State sponsored organizations for
SC/STs for purchase and supply of
inputs and marketing of outputs.
14. Housing loans
15. Fund provided to Regional Rural
Banks. (RRBs).
16. Advances to Self help groups (SHGs)
17. Advances to Software Industries.
18. Advances to food and agro processing
sectors.
19. Investment in venture capital.
In this paper an analysis of Agricultural
Sector and Small Scale Industries within the
PSA has been presented and advances to these
sectors have been analysed over a period of
time.
5. Agriculture
Agriculture has always been a most
neglected sector as far as bank credit is
concerned. That is why, right from 1968,
Government of India directed the banks to
improve their lending to the agricultural sector.
Based on recommendations of the ‘The Working
Group on the Role of Banks in Implementation
of New 20-Point Programme (Chairman: Shri A.
Ghosh), 1982’, banks were advised to achieve
direct agriculture lending of 15 per cent of total
bank credit by March 1985, 16 per cent by
March 1987, 17 per cent by March 1989 and 18
per cent by March 1990. Extant guidelines
stipulate that banks achieve total agriculture
lending of 18 per cent of adjusted net bank
credit (ANBC) or Credit Equivalent of Off-
Balance Sheet Exposure (CEOBE), whichever is
higher, within which indirect lending should not
exceed 4.5 per cent. In India, nearly one-third of
its national income comes from the agriculture
sector. Its economic and social development
directly depends on the expansion of the
agriculture sector. Therefore, it is treated as
primary priority sector lending in India.
Agricultural loans are given to the farmers on
their need-based credit.25
These loans are classified into
following two categories in Chart 1
Chart 1 Categories of Loan to Agricultural Sector
(i)
Direct Agricultural Loans: Under this category,
loans are directly given to the farmers in form of
tractor loan, dairy loan, crop loan, etc. These
loans are given either for a short-term period
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
61
(which is not more than 12 months) or for a
medium and long-term period (which is not
more than 36 months).
1. Short-term loans are given to meet
agricultural expenses and maintenance
of assets such as a tractor, pumping
machine, bore well, etc.
2. Medium and long-term loans are given
for agricultural activities like land
reclamation, farm building, farm
mechanization, and so on.
(ii) Indirect Agricultural Loans: Here,
farmers are provided loans at concessional rates
of interest. Indirect agricultural loans benefit the
farmers in the long run. These loans are given
for cattle feed, warehouse, seeds, pesticides,
rural electrification, subscription of bonds issued
by NABARD, boring equipments, etc.26
In 1979, the amount of loan to
agriculture by SCBs was Rs. 2767 crore which
went up to 13950 crore after 10 years in 1989.
This implies an annual growth rate of 18
percent. We can see the details in the following
table.
In 1999, this figure went up to Rs.
41211 crore which meant an annual growth rate
of 11 percent. This was also 12 percent of NBC
(Net Bank Credit). In 1999 the amount of direct
credit in agricultural advances was 80 percent
(33094 crore) while that of indirect credit was
only 20 percent i.e. (Rs 8117 crore). In 1999-
2000 the growth rate was at a high level of 20
percent, after that till 2010 the growth rate was
continued to grow at a high level of 20 percent
to 50 percent, except in 2002 and 2008 where its
growth rate was only 9 percent and 8 percent
respectively. Priority sectors have been an
integral part of bank credit delivery in India.
Between 2009 and 2010, there was a growth in
priority sector credit from domestic Commercial
banks primarily due to the growth in agricultural
credit. Credit growth to agriculture decelerated
in 2006- 2007 i.e. from 50 percent in 2006 to 29
percent in 2007. The growth of credit to
agriculture sector witnessed moderation during
2010-11 as compared to the previous year. The
sharp decline in the growth of agricultural credit
was partly on account of definitional changes
affected during February- March 2011. It is
pertinent to note that despite the enhancement of
limit (From Rs 50,000 to Rs 1,00,000), for the
waiver of margin/security requirements for
agricultural loans in June 2010, the credit Flow
to the agricultural sector decelerated in 2010-11
over the previous year.27
The share of agriculture which was
only 12 percent in 1999 continue to grow and
reached a high level of 14 percent in 2007, after
which there has been some drop in this figure. In
2011, advances to agriculture reached a level of
Rs 460333 crore which was 12 percent of total
NBC of Rs 3942083 crore. As compared to
1979 when advances to agriculture was Rs 2767
crore (14 percent of NBC) of total NBC of Rs
19116 crore. Variation in advances to
agriculture from 1979 to 2011 amounts to Rs.
457566 crore. It would be observed that the
share of indirect credit to agriculture in total
agriculture credit increased from 20 per cent in
1999 to 29 per cent in March 2004 and 32
percent in 2007 despite the fact that indirect
agriculture advances are reckoned only to the
extent of 4.5 per cent while measuring the
performance of banks in achieving the target of
18.0 per cent of NBC in agriculture. Over the
period of time indirect advances to agriculture
had increased while a direct advance has
decreased from 80 percent in 1999 to 68 percent
in 2007 (table 1)
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences
© 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
62
Table 1: Advances to Agriculture Sector by SCBs
Years
Agriculture Direct Indirect
NBC (Rs
crore)
Growth Rate %
(Agriculture)
Share in
NBC
Account
(000's)
Amount
(Rs crore)
Account
(000's)
Amount (Rs
crore)
% to
agriculture
Account
(000's)
Amount (Rs
crore)
% to
agriculture
1 2 3 4 5 6 7 8 9 10 11 12
1969 568 258 NA NA - NA NA - 3621
7
1979 NA 2767 NA NA - NA NA - 19116 27 14
1989 NA 13950 NA NA - NA NA - 79234 18 18
1999 17184300 41211 16880936 33094 80 303364 8117 20 339477 11 12
2000 16588486 49434 16275952 36466 74 312534 12968 26 398205 20 12
2001 19317769 59310 19035374 40485 68 282395 18825 32 467206 20 13
2002 16352465 64819 15854277 46581 72 498188 18238 28 535063 9 12
2003 17346416 80547 17003304 56858 71 343112 23690 29 668576 24 12
2004 19899256 99302 19634319 70781 71 264937 28520 29 763855 23 13
2005 21666093 131636 20932515 95565 73 733578 36071 27 1005236 33 13
2006 26328590 197024 24417359 136278 69 1911231 60746 31 1403126 50 14
2007 27684846 254692 26187444 172128 68 1497402 82564 32 1801603 29 14
2008 NA 275343 NA NA - NA NA - 2204661 8 12
2009 NA 338656 NA NA - NA NA - 2601949 23 13
2010 NA 416133 NA NA - NA NA - 3244788 23 13
2011 NA 460333 NA NA - NA NA - 3942083 11 12
Source: Reserve Bank of India website, Report on trend and progress of banking in India, Handbook of Statistics 2006
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
63
The growth rate of lending to
agriculture was higher during the period 2003-
2006 as compared to that during the period
1979-99 that is due to reduction in CRR and
SLR rate which increased the availability of
funds to the banking sector as a whole. The
CRR declined from 15 per cent of demand and
time liabilities in 1991 to 5.0 per cent in 2005,
while the SLR declined from 38.5 per cent to
25 per cent during the same period. The
agriculture sector was the major beneficiary,
which together accounted for more than two-
third of incremental priority sector lending in
2005-06. The growth rate of lending to
agriculture sector was highest in 2006 i.e. 50
percent. Credit to agriculture had more than
doubled in the last three years from Rs. 64,819
crore at end-March 2002 to Rs. 131636 crore
at end-March 2005. However, in the last ten
years the share of agriculture credit in NBC
has also increased which shows that banks are
now more willing to lend credit to agriculture.
SCBs as a whole did not achieve the sub-target
of 18 percent of NBC for agriculture since
1999. Another significant point is that, the
share of direct credit to agriculture which was
80 percent in 1999 has come down to 68
percent in 2007, while the share of indirect
credit increased to 32 percent in 2007 (table 1)
While the entire banking sector has
improved its lending to agriculture, the major
thrust has come from the public sector banks.
In the following table 2 we can see how public
sector banks have performed in providing
loans to agriculture sector.
As compared to SCBs as a whole, the
share of PSBs in direct credit to agriculture has
been higher. This implies that non-public
sector Scheduled Commercial banks have been
giving a lesser percentage in terms of direct
credit to agriculture and more to indirect
credit. For agriculture advances the share of
PSBs in NBC is higher as compared to SCBs,
it means that the share of non public sector
Scheduled Commercial banks in NBC is lesser
for agriculture advances. The performance of
Public Sector Banks (PSBs) and
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences
© 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
64
Table 2: Advances to Agriculture Sector by Public Sector Banks
Years
Agriculture Direct Indirect
NBC
(Rs crore)
Growth Rate %
(Agriculture)
Share in
NBC %
Account
(000's)
Amount
(Rs crore)
Account
(000's) Amount (Rs crore)
% to
Agriculture
Account
(000's) Amount (Rs crore)
% to
Agriculture
1 2 3 4 5 6 7 8 9 10 11 12
Jun-69 170 162 160 40 (1.32) 25 10 122 (4.04) 75 3017
5
Jun-79 N.A. 2224 N.A 1688 (10.4) 76 N.A 536 (3.3) 24 16233 30 14
Jun-89 197 14,369 190 12,920 (16.5) 90 7 1449 (1.9) 10 78,178 21 18
Mar-99 16634 37631 16349 31167 (11.7) 83 285 6464 (2.4) 17 265554 10 14
Mar-00 16047 45296 15754 34247 (10.823) 76 293 11049 (3.4918) 24 316427 20 14
Mar-01 18753 53571 18482 38137 (11.174) 71 271 15434 (4.5222) 29 341291 18 16
Mar-02 16100 58143 15700 44019 (11.171) 76 400 14124 (3.5842) 24 394064 9 15
Mar-03 16765 70502 16455 51485 (10.61) 73 310 19017 (3.9188) 27 485271 21 15
Mar-04 18992 84435 18750 62170 (11.08) 74 241 22265 (3.97) 26 560819 20 15
Mar-05 20171 109917 19494 83038 (11.57) 76 677 26879 (3.74) 24 717419 30 15
Mar-06 23798 155219 22079 112126 (11.01) 72 1719 43093 (4.23) 28 1017656 41 15
Mar-07 25113 202614 23746 144372 (11) 71 1367 58242 (4.4) 29 1313840 31 15
Mar-08 28349 248685 27908 176135 (12.9) 71 441 72550 (5.3) 29 1364268 23 18
Mar-09 29368 298211 28836 215642 (12.73) 72 532 82569 (4.87) 28 1693437 20 18
Mar-10 31615 372463 31015 265826 (12.78) 71 600 106637 (5.13) 29 2078397 25 18
Mar-11 33910 414973 33214 300190 (12.03) 72 696 114783 (4.60) 28 2493499 11 17
Note: Figures in bracket represent percentage share in net bank credit
Source: Economic Survey, Various issues.
Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss
65
private Sector Banks over the years in extending
agriculture credit, including direct agriculture, has
improved.
The total credit extended by the public
Sector banks to agriculture, went up from Rs.162
crore in June, 1969 (5 percent of NBC) to Rs 2224
crore in June 1979 and formed 14 percent of NBC.
The rate of progress was quite rapid soon after
nationalisation but later progress was more modest.
The growth rate of lending to agriculture sector was
30 percent in 1979 from 1969 and 21 percent in
1989 as compared to 1979. In 1999 the growth rate
of lending to agriculture sector was 10 percent as
compared to 1989. It means the rate of progress of
PSL was slow after banking sector reforms. The
relatively slow progress of advances to the priority
sectors were due to the fact that the bank officials
from top to bottom were not imbued with the new
objectives of banking (table 2). At the same time,
Banks were also worried at the poor and
unsatisfactory recovery performance of the
agriculture Sectors. Direct and indirect advances to
agriculture, taken together also registered an
increase. In 1989 the share of agriculture to NBC
was 18 against the target of 17 percent. After that
the percent of agriculture to NBC has decreased to
14 percent in 1999. Public sector banks are not able
to meet the sub-targets of 18 per cent for agriculture
from 1999 to 2007. Non-achievement of agriculture
lending target by many public and private sector
banks is due to low capital formation in agriculture
resulting in poor credit absorption and write-off of
Non-performing loans leading to reduction in the
outstanding advances in the case of some banks.
Public sector banks have achieved the sub target of
18 percent of NBC in 2008 and formed 18 percent
of NBC while growth rate has decelerated to 23
percent from 31 percent of 2007 (table 2)
Oct 2013. Vol. 3, No.2 ISSN 2307-227X
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66
6. Small Scale Industries
Small Scale Industries (SSIs) constitute an important
and crucial segment of the industrial sector in most of the
developing countries like India. They play an important role in
employment creation, resource utilisation and income generation
and help to promote changes in a gradual and phased manner.
They have been given an important place in the framework of
Indian planning since beginning both for economic and
ideological reasons. The reasons are obvious. The Small Scale
Industries Board in 1955 defined, "Small-scale industry as a unit
employing less than 50 employees if using power and less than
100 employees if not using power and with a capital asset not
exceeding Rs. 5 lakhs". The new Policy Initiatives in 1999-2000
defined small-scale industry as a unit engage in manufacturing,
repairing, processing and preservation of goods having
investment in plant and machinery at an original cost not
exceeding Rs. 100 lakhs.28
Loans given to small-scale and ancillary industries are
treated as priority sector. These industrial units are those which
undertake manufacturing, processing, and preservation of goods
(Chart 2).
Chart 2: Priority Sector Lending to Small Scale Industries
In case of these industries, investment made
in fixed assets must not exceed the
maximum limit notified by the Government
of India. Such small-scale and ancillary
industries create newer job opportunities in
the market. Table 3 shows how SCBs have
performed in providing loans to Small Scale
industries.
Table 3: Advances to Small Scale Industries by SCBs
Years Account (000's) Amount (Rs crore) NBC (Rs crore) Growth rate % (SSI) Share in NBC
1 2 3 4 5 6
1969 72 347 3621
10
1979 NA 2635 19116 23 14
1989 NA 15543 79234 17 20
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1999 2533014 51679 339477 15 15
2000 2325060 57004 398205 10 14
2001 2069962 60141 467206 6 13
2002 1931189 67107 535063 12 13
2003 1816846 64707 668576 -4 10
2004 1806614 71209 763855 10 9
2005 1473220 83498 1005236 17 8
2006 1808062 102168 1403126 22 7
2007 1816788 127323 1801603 25 7
2008 NA 132698 2204661 4 6
2009 NA 168997 2601949 27 6
2010 NA 206401 3244788 22 6
2011 NA 229101 3942083 11 6
Source: RBI, Handbook of Statistics on Indian Economy, 2006, Report on trend and progress of Banking in India, 2008
In 1969 the Priority Sector advances to Small Scale
industries by SCBs in India were Rs 347 crore which went
up to Rs 2635 crore in 1979 after ten years, thus the
annualized growth rate in 1970s was 23 percent. In 1989 it
was Rs 15543 crore which was 20 percent of NBC with an
annual growth rate of 17 percent over 1979. The growth
rate of lending to SSI fell sharply from 1979 to 2001, after
that it accelerated to 12 percent in 2002 and then
decreased to 4 percent in 2003. Bank credit to SSI also
increased sharply by 10 percent in 2004 over 2003 (table
3). The growth rate of lending to SSI continuously
increased from 2004 to 2007, and out of that the highest
growth rate was in 2007 i.e. 25 percent. Several favourable
policy initiatives undertaken by the Central Government
and the Reserve Bank including, inter alia, the policy
package for stepping up of credit to Small and medium
enterprises (SMEs) announced on August 10, 2005, have
had a positive impact, that is why growth rate of lending to
SSI was highest in 2006 and 2007. Credit to small-scale
industries, after increasing from Rs. 67107 crore at the end
of 2002 to Rs 83498 crore at end-March 2005, further
increased to Rs. 127323 crore at the end of 2007.
Advances to Small Scale industries by Public Sector
Banks are depicted in Table 4
Table 4: Advances to Small Scale Industries by Public Sector Banks
Years Account (000's) Amount (Rs crore)
NBC (Rs
crore) Annual Growth Rate % (SSI) Share in NBC
1 2 3 4 5 6
Jun-69 51 251 3017
8.3
Jun-79 NA 2061 16233 23.4 12.7
Jun-89 27 13248 78178 20.4 16.9
Mar-99 2425 42591 265554 12.4 16.0
Mar-00 2241 46045 316427 8.1 14.6
Mar-01 1986 48400 341291 5.1 14.2
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Mar-02 1851 54268 394064 12.1 13.8
Mar-03 1722 52646 485271 -3.0 10.8
Mar-04 1709 58311 560819 10.8 10.4
Mar-05 1395 67999 717419 16.6 9.5
Mar-06 1729 82434 1017656 21.2 8.1
Mar-07 1685 102550 1313840 24.4 7.8
Mar-08 NA 148705 1364268 45.0 10.9
Source: Economic Survey, various issues
The growth rate of lending to small Scale
industries by public sector banks was higher before
nationalization but later the growth was modest. The
growth rate of lending has continuously decreased after
1989 till 2001. Growth rate of lending was highest in 2008
i.e. 45 percent (10.9 percent of NBC). The growth rate was
negative in 2003 i.e. -3.0 percent and formed 10.8 percent
of NBC. In the priority sector advances as on the last
Friday of March 1999, the largest proportion is shared by
small-scale industries (39.8 per cent), followed by
agriculture (37.4 per cent) and a group of other priority
sectors (22.8 per cent). The sectoral credit to sectoral GDP
ratio was the highest for the industrial sector (at 112 per
cent) Followed by agriculture and allied activities (at 41.4
per cent) and then services (at 19.6 per cent) in 2009-10.
During the recent years, the ratio was on a rising trend for
industrial and agricultural sectors, while it was almost
stagnant for the services sector. As compared to SCBs as a
whole, the share of PSBs in credit to SSI has been higher.
This implies that non-public sector Scheduled Commercial
banks have been giving a lesser percentage of credit to SSI
(Table 4)
7. Micro and Small Enterprises
Role of Micro & Small Enterprises (MSE) sector
is vital for employment generation, promoting
entrepreneurship and overall economic growth. As per 4th
All India Census of Micro, Small and Medium Enterprises
(MSME) sector, of the total working enterprises, 95.05 per
cent belong to micro enterprises, 4.74 per cent to small
enterprises and only 0.21 per cent to medium enterprises.
The proportion of these enterprises operating in rural areas
is 45.38 per cent. Advances to micro and small enterprises
sector by SCBs, however, exhibited a significantly higher
growth of 40.4 per cent in 2007-08.29
the details can be
seen in Table 5 The share of Micro and Small Enterprises
which was 7.1 percent in 2007 continued to grow and
reached a level of 13.4 percent in 2010 after which there
has been some drop in this figure. In 2007-08, the annual
growth rate was at a high level of 40.4 percent, after that
the loan to micro and small enterprises decelerated by 20.4
percent in 2008-09 and then accelerated to 33.7 percent in
2010 -11.
Table 5: Advances to Micro and Small Enterprises by SCBs
Years Amount (Rs crore) NBC (Rs crore) Growth Rate % (MSE) Share in NBC
1 2 3 4 5.0
2007 127323 1801603.3
7.1
2008 213538 1840844.8 40.4 11.6
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69
2009 257072 2255017.5 20.4 11.4
2010 362291 2703664.1 29.0 13.4
2011 484473 4893666.6 33.7 9.9
Source: Report on Trend and Progress of Banking in India, Various issues
The total credit provided by SCBs to the micro and small enterprises (MSE) as on last reporting Friday of March
2008 was Rs 2 13538 crore, representing 11.6 per cent of ANBC/CEOBSE and 28.5 per cent of their total priority sector
advances, which increased to Rs 484473 crore (by Rs 270935 crore) in 2011 with 9.9 percent share in NBC and 39.09 percent
of their total priority sector advances (Table 5)
However how public sector banks have performed in providing loans to MSE is given in the following table 6
An analysis between SCBs and PSBs shows that the share of PSBs in MSE has been higher; this implies that non
public Sector Scheduled Commercial banks had given lesser credit to MSE as compared to PSBs. As compared to PSBs the
amount of loan to MSE by non public sector Scheduled commercial banks was Rs. 24773 crore in 2007 which increased to Rs.
115043 crore in 2011 (Table 6)
Table 6: Advances to Micro and Small enterprises by Public Sector Banks
Years
Amount (Rs
crore)
NBC (Rs
crore)
Growth Rate %
(MSE) Share in NBC
1 2 3 4 5
2007 102550 1313840
2008 148651 1364268 45 11
2009 191307 1693437 29 11
2010 276319 2078397 44 13
2011 369430 2493499 34 15
Source: Report on Trend and Progress of Banking in India, Various issues
8. Conclusion
In the last ten years the share of
agriculture credit in net bank credit has also
increased which shows that banks are now more
willing to lend credit to agriculture. Another
significant point is that, the share of direct credit
to agriculture which was 80 percent in 1999 has
come down to 68 percent in 2007, while the share
of indirect credit increased to 32 percent in 2007.
As compared to SCBs as a whole, the share of
PSBs in direct credit to agriculture has been
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70
higher. This implies that non-public sector
Scheduled Commercial banks have been giving a
lesser percentage in terms of direct credit to
agriculture and more to indirect credit. For
agriculture advances the share of PSBs in NBC is
higher as compared to SCBs, it means that the
share of non public sector Scheduled Commercial
banks in NBC is lesser for agriculture advances.
The performance of Public Sector Banks (PSBs)
and Private Sector Banks over the years in
extending Agriculture credit, including direct
agriculture, has improved. The rate of lending to
Agriculture was quite rapid soon after
nationalisation but later progress was more
modest.
The growth rate of lending to small
Scale industries by public sector banks was
higher before nationalisation but later the growth
was modest. As compared to SCBs as a whole,
the share of PSBs in credit to SSI has been
higher. This implies that non-public sector
Scheduled Commercial banks have been giving a
lesser percentage of credit to SSI. The growth
rate of lending to SSI continuously increased
from 2004 to 2007, and out of that the highest
growth rate was in 2007 i.e. 25 percent. Several
favourable policy initiatives undertaken by the
Central Government and the Reserve Bank
including, inter alia, the policy package for
stepping up of credit to Small and medium
enterprises (SMEs) announced on August 10,
2005, have had a positive impact, that is why
growth rate of lending to SSI was highest in 2006
and 2007.
An analysis between SCBs and PSBs
shows that the share of PSBs in MSE has been
higher; this implies that non public Sector
Scheduled Commercial banks had given lesser
credit to MSE as compared to PSBs.
9. Hypotheses Testing
H1: The willingness of the banks to lend
to priority sector is increasing over a period of
time.
In the last ten years (2001-2011) the
share of agriculture credit in NBC has increased
which shows that banks are now more willing to
lend credit to agriculture.
H2: Banks prefer to lend through indirect
means rather than directly to the borrowers to
reduce risk.
Over the selected period of time, indirect
advances to agriculture had increased while direct
advances decreased from 80 percent of
Agricultural credit in 1999 to 68 percent in 2007.
Non Public Sector Scheduled Commercial banks
have been giving a lesser percentage in terms of
direct credit to agriculture and more to indirect
credit.
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