Performance of Priority Sector Lending in India: A Critical Review

With the nationalisation of banks in 1969, financial inclusion became one of the major goals of inclusive growth which was followed by a series of banking sector reforms during decades of 1990s and later in 2000s. Agriculture, micro and small scale enterprises, weaker sections of society, education and export credit were categorised as priority sector by the RBI and forty percent of the Adjusted Net Bank Credit (ANBC) or advances given by the scheduled commercial banks were specifically kept reserved for serving the financing needs of these sectors known as priority sector lending. In addition to commercial banks the state governments, co-operative banks and Regional Rural Banks are also involved in fulfilling the PSL requirements. The present paper is an attempt to critically review the performance of the PSL in India with a focus on analysing the sectoral performance coupled with the assessment of problems of Non-Performing Assets (NPAs) caused by the PSLs with particular reference to Scheduled Commercial Banks (SCBs).

The study is based on secondary data collected from authentic sources such as government publications, reports, manuals, RBI publications and other useful research works and working papers on the subject through a dissectional analysis of secondary data using compound annualised growth rate related to PSL by scheduled commercial banks.

The key findings of the research suggest that PSL across sectors has been significant and the growth rate of NPA of non-priority sector is higher than NPAs of PSL and there is a need of a stricter regulation to curb bad debts in NPA of PSL in future. For recovering corporate bad debts, there are mechanisms to restructure NPA through NCLT or recently introduced Indian Bankruptcy Code and insolvency professionals but there is no such provision for restructuring the NPA caused in PSL. Banks and other institutions adopt traditional methods of debt recovery though not very effective.

The paper reveals an analytical review of priority sector lending by scheduled commercial banks in India with a focus on suggesting multi-pronged strategies to bad debts of PSL by commercial banks.