Private Sector Advancement

Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences © 2013 IJRSS & K.A.J. All rights reserved www.ijsk.org/ijrss

57

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

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


58

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.11

The 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


59

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.22

Shete (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.


60

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

http://lh3.googleusercontent.com/-3txCm2YNQdM/UCYv-D24JsI/AAAAAAAAGOI/VHGgLu7Uj4w/s1024/Agriculture-Sector.png


61

(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)

Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences

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Table 1: Advances to Agriculture Sector by SCBs

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

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

1999 17184300 41211 16880936 33094 80 303364 8117 20 339477 11 12

2000 16588486 49434 16275952 36466 74 312534 12968 26 398205 20 12

2001 19317769 59310 19035374 40485 68 282395 18825 32 467206 20 13

2002 16352465 64819 15854277 46581 72 498188 18238 28 535063 9 12

2003 17346416 80547 17003304 56858 71 343112 23690 29 668576 24 12

2004 19899256 99302 19634319 70781 71 264937 28520 29 763855 23 13

2005 21666093 131636 20932515 95565 73 733578 36071 27 1005236 33 13

2006 26328590 197024 24417359 136278 69 1911231 60746 31 1403126 50 14

2007 27684846 254692 26187444 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


63

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

Oct 2013. Vol. 3, No.2 ISSN 2307-227X International Journal of Research In Social Sciences

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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.


65

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)

Oct 2013. Vol. 3, No.2 ISSN 2307-227X

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66

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

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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

Years Account (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

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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

Years 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

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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

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70

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

2. Working Group on the Modalities of

Implementation of the Priority Sector Lending

and 20-Point Economic Programme by Banks

(Chairman: Dr K.S. Krishnaswamy), (1980)

3. Working Group on the Role of Banks in

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12. High Level Committee on Agricultural Credit

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issues.

25. http://www.rbi.org.in/upload/content/pdfs/66391.pdf

26. http://kalyan-city.blogspot.com/2012/08/what-is-priority-sector-lending-meaning.html

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28. http://www.preservearticles.com/201101153369/note-on-small-scale-industry.html

29. RBI, Report on Trend and Progress of Banking in India, 2007-08.

Private Sector Advancement

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