MUMBAI, April 9: The banking sector has locked up a major chunk of funds in priority-sector lending carrying low yields. Most bankers privately admit the priority sector is the industry's largest chunk of non-performing assets (NPAs).At present, domestic banks have to lend a minimum of 40 per cent of their net credit to the sector, while foreign banks have been set a target of 32 per cent.
The sector encompasses agriculture and allied activities, small businesses, the small-scale industry, housing and "socially and economically backward classes". Foreign banks, unlike their domestic counterparts, are allowed to include export credit as priority-sector lending.
Banks failing to achieve the targets are required to deposit an amount equivalent to the shortfall with specialised institutions like the Small Industrial Development Bank of India (Sidbi) or the National Bank for Agricultural & Rural Development.
Banks earn between 8 per cent and 12.5 per cent on these deposits. More than the low interestincome, bankers are concerned about the poor recovery rate and high manpower needed to handle innumerable small accounts.
For the year ended March 31, 1996, public-sector banks touched 37.8 per cent and private banks, 32.5 per cent. In 1996-97, their performance in this segment substantially improved. Senior public-sector bankers defend the concept of priority-sector lending saying it is the government's commitment to the weaker sections.
The first Narasimham panel on financial reforms in 1991 had suggested that the lending should be slashed to 10 per cent of net-bank credit.
Bankers say small loans are inadequately monitored and recovery rates are poor, leading to a high bad-loans level. This is cited as the main reason of the banks' failure in achieving their targets.
"Under the prime minister's Rajgar Yogana, the industry must be opening thousands of new accounts every year. It is difficult to monitor them," said a senior banker.
A section of bankers, however, feel the lendings can becommercially viable. With a vast network in the rural and semi-urban areas, public-sector banks must treat them as commercial lendings, they add. Others call for a new definition of priority sector. A private banker asks: "Why shouldn't lending to power, roads, telecommunications be not classified as priority sector? Why should they be any less a priority than agriculture?"
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
