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 D ir Growth Rate ec NBC (Rs % Share Agriculture t Indirect crore) (Agriculture) in NBC Accou nt Amount Amoun Account Amount (Rs (000's (Rs % to Account t (Rs % to Years (000's) crore) ) crore) agriculture (000's) crore) 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 16880 1999 17184300 41211 936 33094 80 303364 8117 20 339477 11 12 16275 2000 16588486 49434 952 36466 74 312534 12968 26 398205 20 12 19035 2001 19317769 59310 374 40485 68 282395 18825 32 467206 20 13 15854 2002 16352465 64819 277 46581 72 498188 18238 28 535063 9 12 17003 2003 17346416 80547 304 56858 71 343112 23690 29 668576 24 12 19634 2004 19899256 99302 319 70781 71 264937 28520 29 763855 23 13 20932 2005 21666093 131636 515 95565 73 733578 36071 27 1005236 33 13 24417 2006 26328590 197024 359 136278 69 1911231 60746 31 1403126 50 14 26187 2007 27684846 254692 444 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 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 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. 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 Account Amount (Rs Growth rate % Years (000's) crore) NBC (Rs crore) (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 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 Account Amount (Rs NBC (Rs Annual Growth Rate Share in Years (000's) crore) crore) % (SSI) 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 NBC (Rs Growth Rate % s Amount (Rs crore) crore) (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 Amount NBC Growth Rate Share in Years (Rs crore) (Rs crore) % (MSE) 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. References 1. P. N. Joshi (1972), ‘Financing of Priority Sectors by Commercial Banks’, The Journal of Indian Institute of Bankers, XLIII (1):27-34
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