Recent Trends and Implications of Bank Finance to Priority Sectors - A Review

Though a balanced development of the different sectors of the economy is necessary for the rapid growth of an economy, at any particular time in the growth of any economy one or two or a few sectors of the economy may assume strategic importance in accelerating the rate of growth of the economy or in attaining short-term economic objectives such as increasing the supply of goods and services for containing inflationary pressures or for generating employment opportunities or for attaining other short-term objectives. Such sectors are then designated as the priority sectors of the economy and the commercial banks are directed to lend a certain percentage of their resources to these sectors. This type of credit direction was an important feature of credit policy in India during the regime of nationalised banking from 1969 to 1991. This policy has been continued since 1991, the year in which the present banking sector reforms were launched in the country, because of its importance for the rapid growth of the economy, besides its important theoretical and policy implications. A review of the trends in priority-sector financing by the commercial banks during the period from 1991 to 2009 shows that effective financing of the priority sectors by the commercial banks requires conceptual and policy changes, calling for a review of the concept of Non-Performing Assets, defining an ideal or optimum level of profit for banks, periodic review of the components of the priority sector and related policy measures.