None can dispute that credit is important to agriculture and small industry. But when it is directed through artificial means like prescribing minimum targets as a proportion of total lending, it primarily amounts to meeting a target.

The obsession with attaining these targets often generate a serious erosion in loan-portfolio quality in the two sectors.

The Reserve Bank of India (RBI) admits that the impact of directed credit on resource allocation is not certain, and that in many countries, such a loan has spawned a large portfolio of non-performing assets (NPAs), affecting the bank's viability.

The norms are at variance with profit-orientation and performance. According to a Rezerve Bank of India report, 47 per cent of non-performing assets emanate from the priority sector.

Apart from loans to the small-scale sector and the weaker sections of society, banks are also forcedto undertake "behest" lendings against their commercial judgement following directives from the government, the Board for Industrial & Financial Reconstruction (BIFR) and the courts. The non-performing assets should not lead to the institutions becoming sick, feel industry analysts. According to a leading banker, who spoke on condition of anonymity, if government agencies insist that sick units must be given funds, even in cases where the banks (in their commercial judgment) are reluctant to do so, it should be more of a charge on the budget than on the banking system.