The objective of this paper is to review the studies related to Priority Sector Lending. All commercial banks of India have been given a Priority Sector lending targets by Reserve Bank of India. Priority sector lending is a tool for the government for economic planning. Priority Sector lending means giving the financial institutional assistance to various sectors of economy such as agriculture, Small Scale Industries and others. Main objective of PSL is to channelize financial assistance to neglected sector of economy, so that socio-economic objective of government could be achieved.

The need to channelize the loans to certain sector of economy was traced in RBI first economic policy 1967-68. First, in 1969 with the nationalization of banks RBI give the proposal of priority sector lending.

The concept of 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. In 1974 public banks were advised to give 33 1/3% of their deposits to priority sectors. In 1980 the target of PSL was increased, now the bank had to give 40% of total as PSL. A clear description of various categories has been given at that time. With time various changes had been done in the categories and subcategories of PSL. At the time of reforms (1991) Narashimam Committee give the suggestion to phase out the concept of Priority Sector Lending. The committee says PSL was affecting the profitability of banks negatively. The recommendation of committee was not accepted. In 1998, Narashimam Committee again give the report and said that the concept of PSL could not be phased out as it was affecting the socio-economic motive of the government, but there is a need to work on the quality of the loans disbursed under this category. Committee said that there is a need to check whether the PSL is able to fulfil the basic objective behind it.

Basic objective behind PSL were:

· Provide financial assistance to neglected sector of economy.

· Providing institutional credit facilities at a reasonable rate of interest to large no of borrowers

· Provide loans to small farmers.

· Provide loans to small scale businessman, manufacturers and to education and various others sectors of economy (which are essential for economic development).

Till then various studies had been done by various researcher, RBIs and financial institutions to measure the effect of PSL on banks profitability and on the quality of PSL. Ketkar Kusum, 1993¹ found in her study that priority sector credit has a significant negative effect on the efficiency and productivity of banks. The present study is a review of the PSL studies which has been done from 2000 to 2015.

Literature Review:

Bhattacharya A, 1995² had done a study to study the impact of liberalization on the efficiency of banks. The study told that the objective behind liberalization was to increase priority sector lending to increase the economic and social benefits. Study reflected the fact that PSL of public sector banks was quite high and it had no negative effect on the performance of public banks. PSL of private and foreign banks was less and it has also negative effect on the performance of these banks in the study period.

Shajahan K, 1998³ revealed in his study that till 1954 only 7.3% of agriculture loans were through institutional advance while agriculture share in income was 50%. In 1969 with the nationalization of banks, major changes had been done in the economic system like targets were being fixed for the specific sectors of economy. In March, 1979 33.3% target has been fixed for PSL. In 1983 agriculture target was being fixed 18% of PSL. In 1995 RIDF has been established. Banks were advised to submit the shortfall PSL target in it. Due to PSL agriculture advances increased manifold.

Uma s. ,2001⁴ has conducted a Ph D study in Banglore district with a special reference of SSI priority lending. Researcher studied the impact of PSL on productivity, employment, capital, profitability and intensity of small scale industries. The sample is divided in to two parts: beneficiaries and non beneficiaries. Researcher found an appropriate increase in income and profitability of beneficiaries units of small scale units than non beneficiaries units.

Sathye Milinid, 2002⁵ done a study to know the efficiency of banks in a developing country like India and to compare the Indian banks efficiency with foreign banks. The author used DEA (Data Envelopment Analysis) Approach. The main findings are that banks efficiency in India is lower than in France and UK; and the mean efficiency score of Indian bank is lower than international bank efficiency score. The main reason of this lower efficiency is Priority sector lending.

Dasgupta Rajaram, 2002⁶ done a comparative study of PSL before reform period (1991) and post reform period. The author found that earlier to 1991 agriculture loans were used for small and marginal farmers, now it is being shifted to big and medium farmers. Earlier to 1991 there is no concept of indirect agriculture advances. After 1991 SSI limits has been increased, but it can be understood due to inflationary pressure. Before 1991 PSL is targeted to neglected sector of economy, but now in agriculture sector definition is changed.

Attaullah Ali, Cockerill Tony and Le Hang, 2004⁷ compared the efficiency of Indian and Pakistani banks and tried to find out the reasons of lower efficiency scores of banks of both the countries. The author used DEA (Data Envelopment Analysis) Approach. It is found that in both countries efficiency of banks have increased but still less than international efficiency of banks. Major reason of low efficiency of bank is Non Performing Assets. NPA occurs due to political pressure, pressure on bank manager to give loans to those projects which are not economical viable, legal bindings on banks to directed lending, bad recovery system and economic conditions of the countries.

Burgess Robin, Pande Rohini⁸, Wong Grace, 2005 found in their study that directs lending program help in reducing poverty through branch expansion.

Reserve Bank of India had draft a technical paper on PSL, 2005⁹. In the paper it has been found that initially commercial banks are focusing on industries and export segment of PSL not on Agriculture sector. It was also revealed in the paper that internationality other countries like Japan, Korea, China, Brazil and Indonesia has stared the PSL in form of direct lending, but in most of countries this is not successful, So most of the countries have stopped PSL.

Basu Priya, 2005¹⁰ has done a study on Indian Financial System; the main focus of the study was to know whether the Indian financial system is successful to help the poor or not. In this study she found that in PSL category bank are fulfilling the targets by investments in NABARD and SIDBI. The study also showed that in PSL category itself the rich farmers are getting benefit not small and marginal farmers. Banks also don’t want to give small loans. This study also show some major issue like bribes, delay in giving loans, political interference while disbursing loans by banks.

Mohua Roy, 2005¹¹ reviewed the trend of bank lending to PSL and found that till 2005 agriculture PSL is constant and SSI PSL is showing a decreasing trend. The author also found that in agriculture PSL sector there is a trend of wilful default, so NPA is increasing in this sector.

Das Abhiman, Ghosh Saibal 2006¹² revealed that a huge quantum of Indian banks credit go to priority sector, which has a less interest rate, which decrease the profitability of banks. The author used DEA analysis.

According to Indian Development Report, 2008¹³, RBI had taken various measures to increase credit flow to priority sector. On the recommendations of various committees in 2004-05 RBI announced 30% growth in agriculture sector, which was being doubled in 2005-06. Government issues various schemes time to time like giving small loans (up to rupees 3 lakh) at a interest rate of 7%, issued a scheme of Kissan Credit Card (KCC), in 2004-05 term loans are included in KCC earlier to that only crop loans are covered under KCC. According to this report one more thing come in light that effect of PSL on NPA is ambiguous. The methodology used in report is empirical analysis

Uppal R.K., 2009¹⁴ had studied the trends of PSL and identified some issues related to it. The main issues in PSL were Low Profitability, High NPAs, Quantitative targets, Government Interference and Transaction Cost. The study also suggested certain strategies to overcome this problems like: NPA Recovery System, Simple rate of interest not compounded one in case of agriculture loan, Discretionary power to branch managers, Qualitative targets. Researcher analyzed the trends by categorizing all Indian banks in to three categories: Public Banks, Private Banks and Foreign Banks. The Period of the study was 2006-2007.

Ahmed Ud-din Jaynal, 2010¹⁵ had done a study in Barak Valley to analyze the performance of PSL in study area. Researcher found that the banks are able to achieve the mandatory target of 40% in the study area, but SSI and agricultural advances are comparatively getting less attention than trade and services. Recovery Performance of Banks in Priority Sector Lending is not satisfactory; NPA of PSL is more than non PSL. There are various factors which affect the performance of PSL such as: interest rate, performance of banks measured with Credit-Deposit (C/D) Ratio, branch expansion and volume of business.

Kaur Jasmindeep, Silony, 2011¹⁶ had reviewed the performance of commercial banks with reference to PSL after reforms era. The researcher analyzed that post reforms PSL of private banks grew faster than public banks. The study also conclude that before 2002 main focus of PSL was on Agriculture sector but after 2002-03, both public and private banks focused on service sector, as this sector emerge as a leading factor for economic development. The study also compared the PSL NPAs of public and private banks and concludes that PSL NPA of public banks was more than private banks. The study was based on secondary data which has been collected through ‘Report on Trend and Progress of Banking in India’ for the various years. The period of the study was 1990-91 to 2007-08.

Raman P., Thangavel N., 2011¹⁷conducted a study on social banking of India. This study was an attempt to know whether the Priority Sector Lending was able to achieve the social banking objective of RBI or not. This study found that in some extent it was successful like Branch expansion in rural areas, Credit to Micro and Small enterprises, Women Entrepreneurs, Sponsored Regional Rural Banks and advances to weaker section. But according to this study PSL was not successful in some areas like agriculture. This study said that the number of dependent persons on agriculture for food and livelihood remain unchanged but still banks are not able to fulfill the mandatory target of 18% in agriculture PSL.

Ghosh, 2011¹⁸ found in his study that Priority sectors like agriculture, SSI and others are also a reason of increasing NPA of Public and Private sector banks.

Kaur, J. 2012¹⁹, studied the growth of PSL in Punjab from 1991 to 2011. The researcher studied the view of 300 beneficiaries of the field and 48 managers of selected banks. The research found various factors which are responsible for negative performance of PSL such as inadequacy of loans, illegal payment, rate of interest and delay in disbursement of loans. It is also found in the study that agriculture advance of both public and private banks has increased in study period but it was 12 to 15% for public banks and 12 to 13% for private banks. It means both public and private banks were not able to fulfil the mandatory 18 % target in agriculture. It was also found that both public and private banks believe that NPA was more in PSL. The study also found that most of the beneficiaries are not satisfied with the behaviour of banks.

Patidar Suresh, Kataria Ashwini, 2012²⁰ had analyzed the effect of Priority Sector Lending on Non performing assets of banks. The study was a comparison of NPA of PSL of public and private banks. The data was collected through secondary sources like internet, related books, case studies and research articles. Researchers used regression analysis and fitted a linear relationship between PSL and NPA. Researcher found that PSL of both public and private banks priority sector advances increased in study period, the reason for increase in PSL was mandatory target fixed by RBI. Using Regression analysis it was clear that PSL had significant impact over NPA.

Shabbir N., 2013²¹ conducted a study to know the sector wise priority advances in India. The researcher objective was to check the willingness of the banks to lend to priority sector and to know whether the banks were lending to the priority sector by direct means or indirect means. The study show that lending to agriculture had increased but lending to agriculture through direct means had decreased. The study showed that the willingness of banks to lend to priority sector has increased Rajeshwari G, 2013²² had found in her Ph. D. work that in the study period (2001 to 2011) banks are fulfilling the PSL targets. PSL of private banks are declining in the study area. Banks are failed to fulfill the PSL targets in crop loans instead of demand. The study also showed that there is less awareness about the schemes of PSL in the study area.

Selvam N, 2013²³, done a study on customer perception regarding NPA of commercial banks, author found that customer also feel that social and political pressure in form of PSL also play a major role in increasing NPA Banerjee Abhijit, Duflow Esther²⁴, 2014 found in their study that in PSL more administrative and labor cost was involved. The study said that PSL had a less interest rate then market borrowing which had a direct effect on profitability of banking firms.

Dhar Satyajit, Bakshi Avijit, 2015²⁵ done a study to know the main determinants of NPA of Indian banks. The study revealed that there are various factors responsible for NPAs such as lack of infrastructure, bad recovery system, not proper appraisal of loan proposal, and willful default in hope of debt relief, lack of iniative by bank officials and use of loan amount for different purpose. The study also reveals that there was no role of PSL in raising NPA.

Major Issues related to PSL:

According to the above mentioned studies the major issues related to PSL are:

1. Due to fixation of targets by RBI for PSL a major portion of bank credit is going to the neglected sector of economies such as agriculture, SSI and others. All banks are also fulfilling the PSL targets. But quality of PSL is a major issue.

2. Almost all banks (public and private) are not able to fulfil sub target of Agriculture PSL.

3. Prior to reform period (1991) the main focus of PSL was agriculture which has been shifted to SSI afterwards.PSL has an important impact on profitability of banks.

4. In agriculture sector major problem is wavier of debts, political interference and increasing NPA.

5. PSL increase administrative and transaction cost of banks

6. Some studies say that PSL increase the NPA, while some others say PSL has no role to increase NPA.

7. People have less awareness regarding schemes of PSL.

Factors which affects the quality of PSL:

According to the above mention studies, quality is now a major issue in PSL. The different factors which affect the quality of PSL could be categorised in to two categories: First, On the basis of view of banks; Second, On the basis of view of beneficiaries.

On the basis of view of banks major factor of PSL are:

1. Non Performing Assets (NPA), Wilful default

2. Profitability of Banks

3. Increase transaction Cost

4. More administrative and labour cost.

5. Political and Social Pressure for disbursement of loans

6. Use of loans for purpose other than it is actually taken.

On the basis of view of beneficiaries:

1. Awareness of Schemes of PSL

2. Lengthy Procedure

3. Illegal payments

4. Use of loans for purpose other than it is actually taken.

5. Behaviour of bankers

CONCLUSION:

The study shows that due to PSL target fixation overall PSL target is being fulfilled by the commercial banks, but sub target of agriculture sector is not being fulfilled so there is a need to inquire the reasons about it.

Other major research is required regarding the factors affecting the quality of PSL from the view of bankers. As many researchers says that in PSL bankers claim is that it increase NPA, decrease profitability of banks, increase administrative and labour cost and political and social pressure for disbursement of loans, So these factor need to be inquired from the bankers side.

Other major research is required regarding the factors affecting the quality of PSL from the view of beneficiaries. As many researchers says that in PSL beneficiaries claim that they have less knowledge regarding schemes of PSL, it involves illegal payment like bribe and behaviour of bankers is not good, so these factors need to inquired from the beneficiaries.

REFERENCES:

1. Ketkar K. W. 1993. Public sector banking, efficiency and economic growth in India. World Development 21: 1685-1697.

2. Bhattacharyya A. Lovell. C. K. Sahay P. 1997. The impact of liberalization on the productive efficiency of Indian commercial banks. European Journal of Operational Research 98: 332-345.

3. Shajahan K. M. 1998. Priority sector bank lending: some important issues. Economic and Political Weekly: 2749-2756

4. Uma S. 2001. Problems and Prospects of Priority Sector Lending by Commercial Banks (A case study of Small Scale Industries in Bangalore District) Ph.D Thesis. University of Mysore.

5. Sathye M. 2003. Efficiency of banks in a developing economy: the case of India. European Journal of Operational Research 148: 662-671

6. Dasgupta R. 2002. Priority sector lending: yesterday, today and tomorrow. Economic and Political Weekly: 4239-4245.

7. Ataullah A. Cockerill T. Le H. 2004. Financial liberalization and bank efficiency: a comparative analysis of India and Pakistan. Applied Economics 36:1915-1924.

8. Burgess R. Pande R. Wong G. 2005. Banking for the poor: Evidence from India. Journal of the European Economic Association 3: 268-278.

9. RBI Internal Working Group. 2005. Priority Sector Lending. Rural Planning and Credit Department Central Office. RBI, Mumbai, September.

10. Basu P. 2005. A Financial System for India's Poor. Economic and Political Weekly: 4008-4012.

11. Roy M. 2006. A review of bank lending to priority and retail sectors. Economic and Political Weekly: 1035-1040.

12. Das A. Ghosh S. 2006. Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics: 193-221.

13. Indian Devlopment report. 2008 ISBN-13: 978-0-19-569351 5. ISBN-10: 0-19-569351 5

14. Uppal R. K. 2009. Priority sector advances: Trends, issues and strategies. journal of Accounting and Taxation: 079-089.

15. Ahmed U. D. 2010. Priority Sector Lending By Commercial Banks in India: A Case of Barak Valley. Asian Journal of Finance and Accounting.

16. Kaur J. Silony. 2011. Performance Review of Commercial Banks in India with special reference to Priority Sector Lending- A Study of Post Reforms Era. Zenith 1: 47-61.

17. Raman P. Thangavel N. Social banking in india: priority sector lending and its developments-a study.

18. Ghosh S. 2011. Management of Non-Performing Assets In Public Sector Banks: Evidence From India. In International Conference on Management Proceeding No. 2011-057-173. Conference Master Resources.

19. Kaur J. 2012. Priority sector lending: a study of commercial banks in Punjab since 1991.

20. Patidar S. Kataria A. 2012. Analysis of NPA in priority sector lending: A comparative zzstudy between public sectorbanks and Private sector banks of India. Bauddhik 3: 54-69.

21. Shabbir N. 2013. Sectorwise Priority Sector Advances in India. International Journal 3: 2307-227X.

22. Rajeswari G. 2013. Performance of commercial banks with special reference to priority sector lending: a case study of Srikakulam district.

23. Selvam N Customer Perception on Reasons for Non Performing Assets, ASM’s International E-Journal of ongoing Research in Management. ISSN-2320-0065 2013

24. Banerjee A. V. Duflo E. 2014. Do firms want to borrow more? Testing credit constraints using a directed lending program. The Review of Economic Studies 81: 572-607.

25. Dhar S. Bakshi A. 2015. Determinants of loan losses of Indian Banks: a panel study. Journal of Asia Business Studies 9: 17-32.

Received on 28.08.2015 Modified on 17.09.2015

Asian J. Management; 6(4): Oct. -Dec., 2015 page 302-306

DOI: 10.5958/2321-5763.2015.00044.X