Priority Lending In India – Some questions

What is the Basic Objective of Priority sector lending?

The basic objective of setting priority sector targets has been to ensure greater flow of credit to certain sectors where credit would normally not flow to the desired extent.

Should the 40% limit extended?

There was a demand from various stake holders of the society that banks should be given a higher than current 40% target of the Priority sector. But this possibility was ruled out by the Finance Minister Pranab Mukherjee in December 2009. The reason is that out of total deposits, banks have to keep certain amount to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and from the remaining disposable amount 40 per cent is dedicated for the priority sector, so increasing the amount reserved for priority sector lending from present 40 per cent is not possible.

How is progress of Priority sector in recent times?

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 of 18.4 per cent primarily due to the growth in agricultural credit. The growth in agricultural credit from domestic banks was to the tune of 22.6 per cent in 2009-10. Foreign banks, however, posted a much lower growth of 8.8 per cent in priority sector credit in 2009-10 than their domestic counterparts.
By the end of March 2009, out of 27 Public Sector Banks, 24 had achieved the stipulated target of 40 per cent and out of 22 private sector banks, 17 had achieved the target.

  • By end of March 2010, domestic (public and private sector) and foreign banks had more than met their overall priority sector lending targets of 40 and 32 per cent, respectively.
  • However, at individual level, by March 2010, again 24 out of 27 public sector banks and 20 out of 22 private sector banks could meet the overall priority sector target in 2010. Following table from RBI’s latest report shows the scenario:

    The performance of the foreign banks is shown as follows:

    Source of these two tables is “RBI’s Report of Banking 2010”.

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