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Banks: Getting the priorities right… - Views on News from Equitymaster
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  • Dec 13, 2004

    Banks: Getting the priorities right…

    The recent RBI regulation, for reprimanding foreign banks that have failed to comply with the ‘priority sector lending’ norms is a welcome change to the sector’s callous approach. The regulation (linking interest rate on funds deposited with SIDBI with lending shortfall) might restrain the banking sector’s complacency in this respect.

    Disbursals towards small-scale sector, rural housing, educational loans and home loans (up to Rs 1.5 m) are classified by banks under the category of “priority sector lending”. As per RBI regulations, banks have been mandated to disburse at least 40% of their total disbursals to the priority sectors, of which advances to agricultural sector should comprise at least 18%. Foreign banks, because of their limited reach in the rural and semi-urban areas, have been allowed to limit their priority sector advances to 32% of their net banking credit. Any shortfall in the same could be parked by the banks with the SIDBI, while shortfalls in agri-lending could be parked with NABARD, on which they earn interest at the bank rate (6%).

    Priority sector lending is a good option for banks to expand their business. RBI’s latest report on ‘Trends and Progress in Banking’ highlights certain interesting facts about the sector’s performance in this respect. Although PSU banks, given their compulsion to oblige to the statutory regulations and project a ‘socially oriented’ image, continue to outperform the private and foreign banks, it is the private sector banks that seem to have realized the true potential of priority sector lending. The table below substantiates this argument.

    Advances to priority sector
      Rs (bn) % net bank credit
      Mar-02 Mar-03 Mar-04 Mar-02 Mar-03 Mar-04
    Public Sector Banks 1,711 2,031 2,456 43.1 42.5 44.0
    Private Sector Banks 257 367 528 40.9 44.4 47.4
    Foreign Banks 134 148 183 34.0 33.9 34.8
    Source : RBI Trends and Progress in Banking

    At the same time, risks attached to priority sector lending are higher as compared to retail disbursals, as delinquencies are relatively higher. Though the risks are reduced with the Securitisation Act, historically, banks, especially the government owned ones, have had a tough time. While part of the blame could be due to the economic downturn (cyclical factor), the credit appraisal systems of banks were poor and to that extent, banks have to be blamed as well (systemic factor).

    Agricultural advances by PSUs - Not a priority
    (% of net bank credit) 2001 2002 2003 2004
    SBI 15.2 15.8 13.8 12.8
    Canara Bank 15.9 15.1 15.4 14.7
    Corporation Bank 11.0 10.5 9.8 9.6
    Oriental Bank of Commerce 12.9 11.5 11.8 11.8
    Vijaya Bank 15.7 15.1 14.4 13.7
    Bank of Baroda 16.6 15.8 16.6 15.0
    Source : RBI Trends and Progress in Banking

    India, like most developing countries, has been relying less on the agricultural sector for growth in the last ten years. In line with the above ideology, agriculture’s share in GDP has slipped from 34.9% in 1994 to 22.4% in 2004. But that fact remains that more than 60% of the population depends on this sector for their livelihood. From a long-term perspective, it is important for the government and banking sector to realise the significance of this sector for sustained economic growth. With the government targeting 6% to 7% growth, it is a known fact that it would encourage agriculture and enlarge credit to this sector, which would translate into better business potential for banks. This coupled with improved recovery is bound to compliment the banking sector’s performance in times of falling treasury gains.



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