Priority Sector Lending In India

Banks are the key in the hands of government to regulate the market control inflation balanced regional growth and to ensure overall economic development. Banks play vital role in capital formation implementation of effective monetary policy strengthening the link between organized and unorganized money market that provide credit facility to serve the basic sector in developing the economy.

Prior to nationalization commercial bank’s lending was directed towards large industrial houses and affluent societies. Agricultural sector small scale and cottage industries were totally neglected because of both risk factor and urban bias. Initially banks had developed a powerful trend in the direction of monopoly and concentration of economy in the hands of a few. The social control scheme adopted in 1966 and the enactment of banking law amendment act of 1969 was an attempt to ensure an equitable and purposeful distribution of credit keeping in view the relative properties of developmental needs. The scheme was initiated with an aim to subserve the society rather than just to provide private profits. But before the emphasis was given in the year 1967 govt. of India had enacted banking regulation act-1949 and rbi was working as the apex institution to control and regulate the banking business in India.

State bank of India was also working as semi apex banking institution with a number of subsidiaries. Every five year plan was promoted with the guiding principle of equity and social justice. Various special programs were also adopted to relocate the bank resources to the neglected and weaker sector of population. The concept of priority sector was evolved in order to allocate credit inconsistence with the planed priorities. But for many years in spite of various suggestions and efforts made by the govt. banks were not seen so interested in lending to the priority sector. The reason was so obvious. The pre-liberalization period was characterized by controlled interest rate and fixed priority sectors credit. Due to the n.p.a problems and huge transaction cost the banks were avoiding the priority sector lending. But the crisis of 1991 paved the way for liberalization and globalization. This forced them to give importance on the rural sector and make the priority sector lending a viable business operation.

Priority sector lending emerged after nationalization of banks aimed at extending much needed credit to the neglected key sectors of the economy irrespective of the size of the borrowings. In the matter of deployment of bank credit recommendation of different committees on the related issues were reviewed of govt. of India and rbi from time to time and bank lending was directed accordingly. But every effort would be fruitless unless the recipient utilizes it for productive purpose so as to generate income for repayment of loan and to increase their standard of living.