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.

* Lecturer Shia P.G. College, Lucknow.

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 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.11The 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 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.22Shete (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.

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 (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)

Table 1: Advances to Agriculture Sector by SCBs

Years

Agriculture Direct Indirect

NBC (Rs crore)

Growth Rate %

(Agriculture) Share

in NBCAccount (000's)

Amount (Rs

crore)Account (000's)

Amount (Rs

crore) % to

agricultureAccount (000's)

Amount (Rs crore)

% to agriculture

1 2 3 4 5 6 7 8 9 10 11 121969 568 258 NA NA - NA NA - 3621 71979 NA 2767 NA NA - NA NA - 19116 27 141989 NA 13950 NA NA - NA NA - 79234 18 181999 17184300 41211 16880936 33094 80 303364 8117 20 339477 11 122000 16588486 49434 16275952 36466 74 312534 12968 26 398205 20 122001 19317769 59310 19035374 40485 68 282395 18825 32 467206 20 132002 16352465 64819 15854277 46581 72 498188 18238 28 535063 9 122003 17346416 80547 17003304 56858 71 343112 23690 29 668576 24 122004 19899256 99302 19634319 70781 71 264937 28520 29 763855 23 132005 21666093 131636 20932515 95565 73 733578 36071 27 1005236 33 132006 26328590 197024 24417359 136278 69 1911231 60746 31 1403126 50 142007 27684846 254692 26187444 172128 68 1497402 82564 32 1801603 29 142008 NA 275343 NA NA - NA NA - 2204661 8 122009 NA 338656 NA NA - NA NA - 2601949 23 132010 NA 416133 NA NA - NA NA - 3244788 23 132011 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

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

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 Agricult

ureAccount (000's)

Amount (Rs crore)

% to Agricult

ure1 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 5Jun-79 N.A. 2224 N.A 1688 (10.4) 76 N.A 536 (3.3) 24 16233 30 14Jun-89 197 14,369 190 12,920 (16.5) 90 7 1449 (1.9) 10 78,178 21 18Mar-99 16634 37631 16349 31167 (11.7) 83 285 6464 (2.4) 17 265554 10 14Mar-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 40014124

(3.5842) 24 394064 9 15Mar-03 16765 70502 16455 51485 (10.61) 73 310 19017 (3.9188) 27 485271 21 15Mar-04 18992 84435 18750 62170 (11.08) 74 241 22265 (3.97) 26 560819 20 15Mar-05 20171 109917 19494 83038 (11.57) 76 677 26879 (3.74) 24 717419 30 15Mar-06 23798 155219 22079 112126 (11.01) 72 1719 43093 (4.23) 28 1017656 41 15Mar-07 25113 202614 23746 144372 (11) 71 1367 58242 (4.4) 29 1313840 31 15Mar-08 28349 248685 27908 176135 (12.9) 71 441 72550 (5.3) 29 1364268 23 18Mar-09 29368 298211 28836 215642 (12.73) 72 532 82569 (4.87) 28 1693437 20 18Mar-10 31615 372463 31015 265826 (12.78) 71 600 106637 (5.13) 29 2078397 25 18Mar-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 creditSource: Economic Survey, Various issues.

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)

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

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 6Source: 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

YearsAccount (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

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

Year

s

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

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 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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