Using bank-level PSL data from March 2006 to March 2023, the study finds that the share of priority sector loans in banks’ total loan portfolio depends, among other things on the asset quality of such loans.
“The introduction of PSLCs played a pivotal role in helping banks develop a niche in certain priority sectors, and consequently, increasing lending to these (segments)” said Sambhavi Dhingra, Arpita Agarwal and Snehal Herwadkar from the Reserve Bank’s department of economic and policy research in a study titled “Priority Sector Lending: The Indian Experience” published in the latest monthly bulletin. ” The empirical analysis also suggests that high growth in PSL is not associated with a deterioration in banks’ asset quality”. The views are of the author and not necessarily that of the central bank.
Historically, loans originating from priority sectors have had higher NPAs than their non-priority sector counterparts, of which the majority have been on PSBs’ books. However, the trend reversed in 2015, in part due to better recognition of NPAs after the asset quality review, the authors said.
Lending to the priority sector has generally remained above 40 per cent across time periods and bank groups, and the exact proportion is contingent upon, the bank’s overall business strategy,reach, asset quality of such loans, and their expertise.
In case of agriculture, PSBs, on most occasions, have fulfilled their target of 18 per cent, private sector banks (PVBs), which were earlier consistently short of the target, have in recent years aligned to the target.On the other hand, PVBs have fared better than PSBs in achieving the sub-target of lending 7.5 per cent of their ANBC or CEOBE to micro enterprises. Both PSBs and PVBs have met their targets for lending to weaker sections, with PSBs ahead of their private sector counterpartsResults of the empirical analysis the asset quality of the priority sector portfolio plays a significant role in determining the PSL share of banks. Although PSL is mandated by regulatory requirements, banks take into consideration the usual risk-return trade-off when extending these loans.
Wider bank reach, measured by bank branches to-assets ratio, is positively associated with higher share of loans disbursed to the priority sector. Banks with greater brick-and-mortar presence are better placed to extend priority credit at grass-roots level.
