Priority Sector Lending: Compliance or Business Opportunity?

Introduction

The sectors which provide the basic needs of a mankind (i.e. food, shelter and cloth) and are crucial for the development of the economy are priority sectors. These sectors are not only for the Government, RBI or Bank but a priority of each & every individual. These sectors need not require any bench mark stipulation by the regulator.

The description of the priority sectors was formalized in 1972 on the basis of the reports submitted by the informal study group on statistics relating to advances to the priority sectors constituted by Reserve Bank of India (RBI) in 1971. In November 1974, banks were advised to raise the share of priority sectors in their aggregate advances to the level of 33 1/3 % by March 1979. In March 1980, all commercial banks were advised to achieve the target under priority sector lending 40 percent of aggregate bank advances by 1985.

 

Categories under priority sector

  1. Agriculture
  2. Micro Small and Medium Enterprises
  3. Education
  4. Housing
  5. Export Credit (Not a separate category. However export advance under agriculture will be treated as Agriculture, similarly, export under MSE will be grouped under MSE)
  6. Social Infrastructure
  7. Renewable Energy
  8. Others

 

Benchmark as per new Priority Sector Guidelines

Sl No Parameter Benchmark
1 Total Priority Sector Advances 40% of ANBC
2 Total Agriculture

W/W Small & Marginal Farmers

18% of ANBC

08% of ANBC

3 Advances to Weaker Section 10.00% of ANBC
4 Lending to Women Beneficiaries 05.00% of ANBC
5 Lending to Micro Enterprises 7.50 % of ANBC
6 Lending to Minority communities 15.00% of Priority Sector Lending

 

Banks under RBI’s strict directives has to achieve the benchmark fixed for the priority sector otherwise shortfall in lending priority sector target/sub-target on the above mentioned parameters, they will have to pay the penalty in the form of parking the fund in the Rural Infrastructural Development Fund (RIDF) established with NABARD and other funds with NABARD/NHB/SIDBI/other financial institutions as decided by RBI from time to time.

“A smaller margin in large number of units is equivalent to higher margin in one unit.” “The future lies with those companies who see the poor as their customers.” Fortune for business and opportunities lies at the bottom of the Pyramid. These statements were made by the renowned management guru Prof. C K Prahlad hold good for all the time and are applicable for all the business activities including banking industries. On the basis of this theory many companies in the recent past made a huge profit which is very much visible in marketing of various products and services.

 

The objective of nationalization of Banks

One of the main objectives of nationalization of bank were to provide timely and adequate credit facilities to agriculture, weaker sections, small industries, etc and to encourage the new classes of entrepreneurs. The very purpose of nationalization of banks is to develop the society by giving them employment opportunity through banking system. In National Credit council meeting held in July 1968, it was emphasized that commercial banks should increase their involvement in financing priority sectors.

There is great responsibility on all of us (Banker) as a responsible citizen and officer of the society to contribute for its overall development. It is not only sufficient to sanction and disburse the loan to the customers but to guide them for their utilization and diversification of their activities so that everyone will contribute to the economy.

Mahatma Gandhi said, “Give a PIE to everyone”. PIE stands for production, investment and employment. Banks can create an employment opportunity for every individual in the society.

 

MNCs of Tomorrow

Yesterday’s DRI (Differential Rate of Interest i.e. lending at the rate of 4% to the weaker section) borrowers are today’s big corporate and business conglomerates. These are the result of timely and easy availability of finance. Therefore the weaker section people and priority sector lending will create many more business tycoons in the years to come. The successful MSMEs grow into large corporate with passage of time and there is every possibility that they could be MNCs of tomorrow. It is the Banking Industry only which can transform the society and economy as whole. It’s a fact that sound banking system reflects the strength of economy.

Compliance Lending Vs Business Lending

The benchmark for the financing to priority sector has been fixed by Reserve Bank of India for the sole purpose of financial inclusion so that everyone will contribute in the economy. The compliance has to be met by all banks for achieving the same therefore priority sector lending is treated as compliance lending rather a kind of business lending. Now it is an established fact that this sector is no more a compliance lending rather it’s a business proposition which every bank is vying for including private sector and foreign bank. They are targeting the rural areas where two-third of our population still depends on agriculture and allied activities and is the biggest market for all products.

Many bankers avoid lending to weaker section as there is an apprehension that the loan account will turn into bad and bank has to make provision. However the minimum lending to these sectors are being done by the banks to save their faces as they have to comply with the guidelines issued by our regulator. Banks are in the race of increasing their size of balance sheet by financing to big corporate which may not result into sustainable development of the bank as well as economy.

 

Tremendous Potential

According to Nobel Laureate Md. Yunus: “Poor are also Bankable” which is now a proven fact. Weaker section or poor people are honest and are having tremendous repaying capacity. A huge potential and capacity to repay the loan is available. Can we think that how much interest they are paying to money lender? It’s incredible but it’s a fact. All the weaker section people in Metro/Urban/Semi-Urban/Rural areas like street vendor, vegetable vendor, fruit vendor, etc are borrowing money and paying a huge interest. They are borrowing Rs.100/- in the morning and repaying Rs.110/- in the evening, it means the rate of interest on such a borrowing is 10% per day which becomes 3650% per annum and if they are not repaying it in time, they will not get further loans.

Recently when enquired with the rickshaw pullers in some of the towns, they informed that they are paying Rs.60/- per day to the rickshaw owner which means they are paying Rs. 21900/- annually to the rickshaw owner which is having a total cost of Rs.12000/- only without owning anyone. An auto-rickshaw driver is paying Rs. 150/- per day to the owner which is equal to total sum of Rs.54750/- paid by them annually. The cost of Auto-rickshaw is approx. Rs.150000/- only, the repayment of installments of the loan amount for owning the same can easily be made by the customer. The same is the case with taxi driver. If we compare the rate of interest charged by the bank, it’s a nominal interest of 10 to 12 per cent only which cost less than a rupee. As they are not aware of the rate of interest paid by them and also they are getting the financial assistance in time without completing the cumbersome formalities of nationalized banks, therefore the business of informal money lenders are increasing day by day. They are getting their employment and earning of livelihood from them so they are more sentimentally and emotionally attached with the money lenders and that is the reason why they don’t default in repaying the loan to them and therefore, the numbers of money lenders are also on the rise.

 

Why Bank’s Loan become NPA?

If there is a huge potential and having tremendous repaying capacity the question arises that why this happens only to the bank whatever we are financing to poor people are turning into NPA and the repayments are not coming in time even if they are ready to pay higher interest. First of all we have to analyze the cause of it. The major cause of the account turning into NPA is lack of our concern and connectivity with the customers and the borrowers are not properly being advised, guided and educated regarding the timely repayment of loan and also they don’t believe that after repayment of the loan whether they will get continuous support from bank. We are following the Know Your Customer guidelines issued by our regulator only as compliance but actually not knowing the customers fully. If we don’t know the customers, we are not in a position to serve them and offer the products which are suitable and in time as they require. The bankers are not developing deeper bonding and relationship with them due to several reasons and limitations. At the same the banks will have to inculcate the confidence among the customers that whenever they need money for any requirement, they will get the hassle free credit from the banks. There is no question of account turning into NPA if we know the customers and select the borrower as well as project after conducting the proper due diligence.

As per the statistics published by Banks, RBI, etc it is found that the NPA under priority sector is much less than Non-priority sectors. It shows that lending to the priority sector banks will be have lesser NPA which is the top most concern and challenge for the Banking Industry.

 

Conclusion

No growth or development is complete if it not wholesome and wholesome includes every section of society more particularly poor, backward and needy sections of the society. It is well established fact that the Financial Inclusion is now need of the hour for the development of the economy. The priority sector lending is no more a compliance but a very good business proposition and an opportunity for the Banks to tap the business.

The banks have a big role to play to develop the economy by providing timely and adequate credit to the people and by exploring the untapped potential already existing in our country. By providing timely and adequate credit to the people of country through formal banking system, a trust of relationship will be developed and it leads to achieve the Financial Independence for all. If the 80 crores people living in rural India can be provided with the skills to be fully productive, this will unleash yet another force to create the emerging rural middle class that can transform India into the fastest growing economy in the world. It will not only create employment and income but will add to the GDP of our country and also reaching ahead with our competitors (China, etc).  The impact will be transformational not only for India but for the global economy. There is greater responsibility on all the banker and officer to develop our society and contribute in building a stronger economy. New and innovative efforts will go a long way in helping the individual resulting into the rise of a developed country.


Author

Hrishikesh Mishra
Chief Manager (Faculty)
Staff College, Union Bank of India, Bengaluru