•Priority sector-Some areas or fields in a countrydepending on its economic condition or governmentinterest are prioritized and are called priority sectorsi.e. SMEs, agriculture. these may further be sub divided.• Priority sector lending-Banks are directed by the centralbank of the country that loans must be given on reducedinterest rates with discounts to promote these fields. Suchlending is called priority sector lending
The concept of Priority Sector Lending is mainly intended to ensure that assistance from banking system should flows in an increasing manner to those sectors of the economy which though accounting for a significant proportion of the national product have not received adequate support of institutional finance in the past At the meeting of National Credit Council held in JULY 1968, it was emphasized that commercial banks should increase their involvement in the financing of priority sector i.e. agriculture and small scale industries. The description of priority sector was later formalised in 1972
1. Agriculture 2. Small Scale Industries 3. Small Road and Water Transport Operators 4. Retail Trade 5. Small Business 6. Professional and Self-employed persons 7. Education 8. Housing Finance
Agricultural sector suffers from several challenges, namely, i. Fragmented and uneconomical size of landholding; 83 per cent of the landholdings are held by small & marginal farmers and average landholding size is 0.6 ha3 per farm household; ii. High wastage due to inadequate storage and supply chain infrastructure. Estimates indicate that 7 per cent of grain output, 10 per cent of seeds and 25 per cent to 40 per cent of fruits and vegetables are wasted every year ; iii. Significant dependence on monsoon and inadequacy of irrigation facilities; iv. Low level of farm mechanization; v. Inadequacy of extension services in agriculture
SMALL SCALE INDUSTRIES Those engaged in the manufacture, processing or preservation of goods. Investment in plant and machinery doesn’t exceed 1 crore TINY ENTERPRISES: small scale units where investment is upto Rs 25 lakh. SMALL SCALE SERVICE AND BUSINESS ENTERPRISES: industry related service and business enterprises with investment upto 10 lakh in fixed assets excluding land and building. Indirect finance will include credit to: Agencies involved in assisting the decentralized sector Govt. sponsored corp. providing funds to weaker sec. Advances to handloom cooperatives Credit provided by banks to KVIC
Role of Micro & Small Enterprises (MSE) sector is vital for employment generation, promoting entrepreneurship and overall economic growth. Inadequate credit assistance. Lack of machinery and equipment Competition from large-scale units and imported articles Absence of adequate infrastructure Irregular supply of raw material
• To get out of vicious poverty circle: 70 % of Indian population lives below poverty line, 33% of global poor are Indians buying land or equipment expanding a business improving housing securing a job (which often requires paying a large bribe), etc to reduce unemployement
Education is one of the factors which will enable us optimize and leverage our demographic dividend Education is an investment that augments the stock of human capital over a period Education loans extended by banks have brought higher education within the reach of the deserving poor and brought it to the masses Improved training and skilling are critical for providing employment opportunities to the growing mass of younger people and necessary to sustain the high growth momentum The needs of education, skill and capacity building necessitate adequate flow of credit to this sector
Nature Domestic banks (both Foreign banks public and private) operating in IndiaTotal priority sector 40%of NBC 32%of NBCadvancesTotal agricultural 18%of NBC No targetadvancesSSI advances No target 10%of NBCAdvances to weaker 10%of NBC No targetsectionExport credit Export credit doesn’t 12%of NBC form part of priority se
RATE OF INTEREST OF LOANS UNDER PRIORITY SECTOR? AS per the current interest rate policy, in the case of loans upto Rs 2 lakh, the interest rate should not exceed the prime lending rate (PLR) of the bank, while in the case of loans above Rs 2 lakh, banks are free to determine the interest rate. MONITORING OF PRIORITY SECTOR LENDING BY RESERVE BANK Priority sector lending by commercial banks is monitored by Reserve Bank of India through periodical Returns received from them. Performance of banks is also reviewed in the various fora set up under the Lead Bank Scheme (at State, District and Block levels).
M V NAIR , Union Bank Chief, Head of RBIcommitteePriority sector targets for public sector and privatesector banks could be retained at the current level of40% of the net credit to the sector.It has recommended severe changes should be madeto exposure of foreign banks. Foreign banks’ prioritysector target should be upped from 32% to 40%.However, this could put pressure on foreign banks toincrease their lending to priority sector categoriesincluding agriculture and export sectors.> Special treatment should be given to small andmarginal farmers and housing loans below Rs 2 lakhsshould be classified under priority sector
RBI had been a little cautious of a bank lending to NBFCs, but the committee has recommended that 5% of banks credit to NBFCs could be classified priority sector. Lending to gold companies will not be classified as priority sector. Securitized loans could also be classified under the priority sector. This will remove the pressure on banks and NBFCs while lending to these sectors. It would come as a relief for banks and NBFCs.
Increasing role of private sector Effective working and monitoring To contribute to development of economy To maintain healthy competition To achieve the target of financial inclusion
In order to address to the growing need of the economy , the private sector bank must work hand in hand with the public sector banks as suggested by the RBI Only lending will not suffice the need of the hour ,the banks must also focus on: 1)Better application of Asset and Risk Management 2)Reducing the extent of NPAs 3)Assisting borrowers in achieving financial goals