Impact of priority sector lending on indian economy
IMPACT OF PRIORITY SECTOR
• Priority sector lending scheme is a policy of providing a
specified portion of bank lending to the important sectors of
• It includes agriculture, small-scale industries, cottage
sector, tiny sector, export sector, and other small business
• The Reserve Bank of India was first to initiate priority
sector lending scheme in India.
• The main purpose of this scheme was to see that timely and
sufficient credits (loans) are given (provided) to the priority
• Previously, only public sector banks were asked to give
loans to this sector. However, now even private and foreign
banks have to give loans to this sector.
• The PSL program has been implemented by the RBI
since 1974, when banks were advised to raise credit
to priority sectors to the level of 33.3% by March
• Today this number stands at 40%, out of which direct
agriculture lending has to be 18%.
• Direct finance to agriculture shall include short,
medium and long term loans given for agriculture and
allied activities directly to individual farmers, SelfHelp Groups (SHGs) or Joint Liability Groups (JLGs)
of individual farmers without limit and to others
(such as corporates, partnership firms and
institutions) up to Rs. 20 lakh, for taking up
Indirect Agricultural Loans
• Farmers are provided loans at concessional
rates of interest.
feed, warehouse, seeds, pesticides, rural
electrification, subscription of bonds issued by
NABARD, equipments, etc.
• Loans up to Rs. 15 lakh for construction of
houses by individuals, (excluding loans
granted by banks to their own employees)
• Loans given for repairs to the damaged houses
of individuals up to Rs.1 lakh in rural and
semi-urban areas and up to Rs.2 lakh in urban
• Investments by banks in securitised assets of other
banks and financial institutions, representing
loans to various categories of priority
sector, provided original loans fulfill the Reserve
Bank of India guidelines on securitisation.
• Outright purchases of any loan provided the
loans purchased are eligible to be categorized
under priority sector;
• Investments in eligible assets by banks in Inter
Bank Participation Certificates (IBPCs), on a risk
sharing basis, and are held for at least 180 days
from the date of investment are also eligible.
• No loan related and adhoc service charges/inspection
charges should be levied on priority sector loans up to
• The rates of interest on various categories of priority
sector loans will be as per directives issued by RBI
from time to time.
• A register should be maintained at the branch, wherein
the date of receipt, sanction/rejection/disbursement with
reasons therefore, etc., should be recorded. The
• Banks should give acknowledgement for loan
applications received from weaker sections, etc.
TARGETS AND SUBTARGETS SET BY RBI UNDER PSL
• Priority sector lending should constitute 40%
aggregate bank credit.
• Out of the priority sector advances, at least 40%
should be provided to agriculture.
• Direct advances to the weaker sections in
agriculture and allied activities in rural sector
should form at least 50% of the total direct
lending to agriculture.
• The advances to rural artisans, village craftsmen
and cottage industries should be at least 12.5 % of
the total advances to the small scale industries
Expected Effects of Good Priority
• Following may be the expected outcomes of a
strong and good priority sector lending system
1. Increase in Industries and allied activities at
grass root level.
2. Improved living standards of rural people.
3. Poverty eradication.
4. Development of infrastructure in rural areas.
5. Increase in production of agriculture and allied
6. Support to gross domestic product; etc.
Impact on Income
• The average pre-loan income in the agriculture sector
was Rs. 833 and in the post-loan period it has increased
to Rs. 3,458.
• In the SSI sector it has increased from Rs. 656 to Rs.
• In Government-sponsored programmes the average
income has improved from Rs. 500 to 2,062 .
• In other tertiary sectors, the increase was from Rs.
1,180 to Rs. 4,413.
• On the whole the average pre-loan income was Rs. 760
and in the post-loan period it was Rs. 3,212.
Impact on Employment
• In the agriculture sector, the man Labour has recorded an increase of 91
per cent, woman 166 per cent
• The average employment level has increased from 162 to 347 person days
from pre-loan to post-loan period,recording 114 per cent increase.
• In the small-scale industries sector, the man Labour has registered an
increase of 447 per cent and that of woman to 484 per cent .
• The skilled man Labour has increased to 343 per cent and that of woman
to 289 per cent.
• The average employment level has increased from 199 to 926 person days
recording an increase of 365 per cent.
• In the government-sponsored schemes, man Labour has increased to 234
per cent and that of woman to 979 per cent..
• The average increase in employment generation is 338 person days, i.e.
393 per cent.
• In the other tertiary sectors, average employment has increased from 73
to 742 person days, man Labour from 30 to 237 person days, skilled man
Labour from 37 to 330 person days and woman Labour from 6 to 195
Goals Achieved Through PSL
• Eradication of poverty is achieved through the
implementation of PSL programme.
• Through the concept of PSL, upliftment of weaker
sections is made Possible.
• Providing new opportunities for productive and
gainful self-employment to
the educated unemployed youth is one of the
major aims of PSL programme.
• Reduction of unemployment is one of the major
goals achieved through PSL,.
• Due to agriculture financing the goal of selfsufficiency in food is achieved.
SOME PROBLEMS FACED BY BANKS IN
FINANCING WEAKER SECTION
• Increasing N.P.A.
• Political issues
• High over dues
CONCLUSION & RECOMMENDATIONS
• Overall impact of priority sector lending
scheme is positive.
• Banks are now deploying credit in desired
direction and providing an impetus to the rural
• Future prospect of the PSL is bright in India.
• Suggestions regarding weaker section
financing are direct subsidy should be given to
the banks for financing this section so that loss
and NPA of bank be reduced
• Assistance should be provided by local NGO’s
for identification of poor.
• A separate segment of banking operation
“Banking for weaker section ” be created and
result of banks be highlighted with this
• Interest rate should be reduced & subsidized.
• Financial education for weaker section be
spread with more involvement of educational