A Study on Priority Sector Lending by Commercial Banks in India

Abstract

The origin of priority sector prescriptions for banks in India can be traced to the Credit Policy for the year 1967-68, wherein it was emphasized that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture, exports and small-scale industries, as a matter of urgency. However, the concept of the priority sector was formalized in 1972 on the basis of the report submitted by the Informal Study Group on Statistics Relating to Advances to the Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines were issued in this regard in February 1972, indicating the scope of the items to be included under various categories of priority sector.

In most of these cases, the guidelines indicated only the general description of the advances to be included and no ceilings were fixed, except in the case of small-scale industry and road and water transport operators where ceilings on the value of original investments were indicated. The scope and extent of priority sector has undergone several changes since then with several new areas and sectors being brought within the purview of this sector. The article focuses on the changes made over a period of time in lending to priority sectors by commercial banks of India. It also indicates the development of priority sectors due to lending by banks.