The loan availability in rural areas has undergone metamorphic changes with microfinance, digital lending, Direct Benefit Transfer
Dr Manas R. Das
The year 1972 witnessed crystallization of a formal Priority Sector definition. Over the last half-a-century, the Priority Sector Loans (PSL) guidelines have undergone several deep changes. The initial exuberance of banks to promote PSL ebbed gradually due to several factors including those related to macroeconomy in general and agriculture sector in particular, which impacted credit absorption capacity in rural areas. With rising incidence of unproductive loans and excessive external interferences, bankers’ enthusiasm to lend to the Priority Sector waned, leading many banks to fall short of the stipulated targets – overall and sub-sectoral.
Efforts were made to widen the scope of PSLs so that banks could lend to new segments directly besides supporting, indirectly, the asset creation efforts by such Apex financial institutions as NABARD (Rural Infrastructure Development Fund – RIDF), NHB, SIDBI and MUDRA Bank.
The current PSL guidelines require domestic commercial banks (excluding RRBs & SFBs) to achieve, in a fiscal year, a target of 40% of Adjusted Net Bank Credit or Credit Equivalent of Off Balance sheet Exposures as on the corresponding date of the preceding year, whichever is higher. However, several banks fail to meet the target as can be seen from Chart 1, which is self-explanatory.
Therefore, though politically arduous, the above-mentioned current stipulation needs to be phased out. In fact, the Narasimham Committee-I had recommended for reducing the scope of directed credit under the priority sector from 40% to 10%, which couldn’t be accepted, andNarasimham Committee-II had taken a note of this. However, economically speaking, it makes sense, and many bankers would support this, albeit not overtly.
Moreover, the system of target setting has lost its sacrosanctity. Many banks, as already mentioned, fail these targets and prefer depositing the shortfall in the RIDF because they get risk-free and effortless annual return, or trade in Priority Sector Lending Certificates, a scheme which was operationalised by RBI in April 2016.
It is also widely acknowledged that the loan availability in rural areas has undergone metamorphic changes with microfinance, digital lending, Direct Benefit Transfer, etc., entering the turf. Further, with growing rural to urban migration, dependence on agriculture and allied activities will continue to reduce. As per UN projections, by 2046, i.e., as India enters its centenary year of Independence, less than half of its population will be in rural areas.
In view of the above, besides reducing the current target of 40% to 20% gradually, the constituents of the PSLs should be pruned to include just agriculture, micro and small industries, and retail trade and small businesses, as it was originally. Personal Loans segment should be taken out of its purview.
About the Author:
Dr. Manas R. Das is a former senior economist of the State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medalist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of the Indian Institute of Bankers. He has won several awards, besides being a prolific writer.