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European Journal of Business &

Social Sciences

Available at https://ejbss.org/

ISSN: 2235-767X

Volume 07 Issue 04

April 2019

Available online: https://ejbss.org/ P a g e | 1189

An Analysis of Priority Sector Lending and Non-Performing

Assets of Commercial Banks in India

Dr. Sanjeev Kumar

Assistant Professor, Department of Economics, Govt. Degree College Majheen,

District Kangra, Himachal Pradesh, Pin Code-17603, India.

Email-drsanjeeveco0679@gmail.com

Abstract

The objective of the research paper to study the present trends in growth rate, prescribed

lending targets and disparities in priority sector lending and NPAs. The significant relationship

and degree of association between lending and NPAs from the year 2004 to 2017 has also been

worked out. The various statistical tools used in the paper to analyze the data are exponential

growth rate, co-efficient of variation, t-test and co-efficient of correlation. The growth of

priority sector lending was quite lower on the one hand, whereas, NPAs growth was very higher

on the other hand in public sector banks in relation to the private sector banks. The banks owned

by public sector deployed a lower percentage of NBC in priority sector in comparison to private

sector banks. The degree of association/correlation co-efficient (r) between priority sector

lending and NPAs was found to be higher in public as compared to private sector banks.

Financial inclusion and priority sector lending are complementary to each other in the process

of economic growth. Without improvements in priority sector lending, we cannot achieve the

objective of financial inclusion in an agricultural dominating economy like India. RBI and

government should further strengthen the public sector banks in priority sector lending. The

private sector banks are reluctant to finance this risky sector and also they are motivated by

profit maximization rather than social banking.

Keywords: NPAs, Exponential Growth Rate, NBC, Financial Inclusion, Co-efficient of

Correlation.

1. Introduction

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European Journal of Business &

Social Sciences

Available at https://ejbss.org/

ISSN: 2235-767X

Volume 07 Issue 04

April 2019

Available online: https://ejbss.org/ P a g e | 1190

Priority sector occupies a special place in the Indian economy and is an important

feature of the Indian banking policies. Priority sector lending is the crux of social banking.

Under the priority sector lending, bank credit is provided on liberal terms and conditions. At

present, the broad categories of priority sector for all commercial banks are as under [1]:

 Agriculture Credit

 Micro, Small and Medium Enterprises (MSMEs) Credit earlier known as Small Scale

Industries (SSIs) Credit

 ‘Other Priority Sector’ Credit: It includes the retail trade credit, micro-finance,

education and housing loan and credit to weaker sections. Weaker sections further

includes finance to small and marginal farmers with land holding of 5 acres and less,

landless labourers, artisans, village and cottage industries, beneficiaries of Swarnjayanti

Gram Swarozgar Yojana (SGSY), Scheduled Castes and Scheduled Tribes (SC/ST),

beneficiaries of Differential Rate of Interest (DRI) scheme and Self Help Groups

(SHGs).

In India due to the social banking motto, the problem of bad loans did not receive

priority from policy makers initially. However, with the reform in the financial sector and the

adoption of international banking practices, the issue of NPAs received due focus. Thus, in

India, the concept of NPA came into the reckoning after reforms in the financial sector were

introduced. The banks who have extended credit to the priority sector and achieved the target

suffocated on account of mounting NPAs and those who failed to reach their target suffered by

having invested in low-yield Rural Infrastructure Development Fund (RIDF) set up by

NABARD [2].

2. Some Studies on Priority Sector Lending and NPAs

A number of research studies have been conducted in India on various aspects of

priority sector lending and NPAs by the public and private sector banks. Some of the relevant

research studies have been reviewed in this part of the paper. In [3] observed that during the

years 1996-97 to 2004-05, the share of priority sector lending by the public sector banks

continued to hover at around 32 to 33 per cent of net bank credit. Within the priority sector, the

share of credit to small scale industries has declined secularly, while that of agriculture has

Page 3 of 10

European Journal of Business &

Social Sciences

Available at https://ejbss.org/

ISSN: 2235-767X

Volume 07 Issue 04

April 2019

Available online: https://ejbss.org/ P a g e | 1191

continued to be stagnant during the period under review. In [4] found that priority sector NPAs

of public sector banks are nearly double than that of private sector banks. Whereas, in the public

sector banks 50 per cent of the NPAs are contributed by priority sector lending alone, in case

of private sector banks it is not so. Though all the three sectors i.e. agriculture, small scale

industries and ‘Other Priority Sector’ are contributing towards NPAs of public sector banks,

yet, the share of SSIs is highest. [5] observed that during the period from 1995–1996 to 2009–

2010, priority sector lending by the public sector banks increased by 13.99 times and that of

private sector banks, by 35.63 times. Further, it was found that during the period 2005–06 and

2006–07, the level of non-performing assets was very high for priority sector and stood more

than that of non-priority sector advances in public sector banks. In [6] studied priority and non- priority sector NPAs during the period 2001 to 2010. It was observed that one of the major

reasons for NPAs in the banking sector is the ‘Direct Lending System’ (DLS) by the RBI. It

was recommended that the bank management should speed up recovery of good and bad loans

through various modes to decelerate growth of NPAs. [7] studied the priority sector and non- priority sector NPAs of Indian public sector banks from 2005 to 2016. It was found that, the

contribution of priority sector NPAs is more than 50 per cent in total NPAs till 2011. After that

it gradually declined. Non-priority sector NPAs hovered well above 50 per cent after 2011.

3. Objectives, Analysis of Data and Hypothesis Testing

The following are the objectives of the research paper:

 To highlight the growth of priority sector lending and NPAs from 2004 to 2017.

 To study the priority sector lending targets and disparities.

 To find out the significant relationship and degree of association.

The growth, lending targets and disparities in priority sector lending and NPAs of the

public and private sector banks has been analysed in this section. The significant relationship

and degree of association between two variables i.e. priority sector lending and NPAs from the

year 2004 to 2017 has also been explained statistically in this part of the research paper.

3.1 Priority Sector Lending and NPAs of Public Sector Banks