"The lendings should be restricted to only the core sector. Other loans should be left to the banks'commercial judgement. We should be involved in the selection process of beneficiaries in government-sponsored schemes," a senior banker said. The panel also wants the government to extend subsidies directly to the banks, instead of routing it through intermediaries.

The committee, which recently submitted its report, also wants the interest rate to be deregulated and the banks allowed to fix their own level depending upon the cost of funds, risk cost, administration and transaction expenditure and profit margin.

At present, the rates for loans below Rs 2 lakh are fixed by the Reserve Bank of India.

The panel feels the identified priority sectors will not be denied credit as banks would service them according to their expertise by lending at the market rate. "We have suggested that the service-area approach should be abolished as it has led to a number of unviable rural-bank branches. Also, banks -- and not government agencies -- be given the power to identify the beneficiaries as it has given rise toinefficient funds' utilisation," said a panel member.

To speed up recovery, the panel has suggested that the disbursement target for branches at the state and district levels be linked to the recovery percentage. The committee has also mooted an exit policy as a better option than rehabilitation so that the assets recovered can be utilised in productive ways.

At present, the categories that fall under priority-sector lending include direct and indirect finance to the agriculture industry, small-scale industries, loans for setting up industrial estates, advances to small-road and water-transport operators, retail traders, small business, professional and self-employed persons.

Advances to state-sponsored organisations for scheduled castes and tribes, educational loans, housing loans, funds for regional-rural banks and loans to non-governmental organisations also fall under the category.