The concept of priority sector was evolved in the late sixties in order to focus attention on the need to ensure adequate credit facilities to certain neglected sectors of the economy particularly in the rural areas where banks had hardly made their presence felt.
The involvement of banks in priority sector lending has grown considerably since then along with the extension of the branch network of banks into the rural areas with special emphasis on opening branches in unbanked areas.
With a view to ensuring flow of credit to the neglected sectors like agriculture and small scale industries, the concept of priority sector lending was evolved and commercial banks were advised to grant at least 40% of their total advances to borrowers in the priority sectors, comprising agriculture, small scale industries, small road and water transport operators, retail trade, small business, professional and self-employed persons, education, and for housing purposes within certain limit.
The banks advance to the priority sector which stood at 14% of their total advances in June 1969 increased to 46% as at the end of December 1988, though this percentage is marginally falling since then.
In March 1997, scheduled commercial banks', advances to priority sector stood at Rs. 93,807 crore constituting 35 per cent of total credit of commercial banks.
One will be surprised to know that even the most developed nation in the world viz. USA has enacted a law called 'Community Reinvestment Act, (CRA) under which banks are required to invest/utilize a certain amount of their deposits in poor areas.
As of now the Indian Rural Credit Delivery System comprise about 33,000 branches of commercial banks and RRBs and over 92,000 outlets of credit co-operatives at the base level.
Broadly, the categories of bank advances included under priority sector are: (a) Agriculture (b) SSI (c) Small road and water transport operators, retail traders, small business operators, professionals and self employed persons, SHGsXNGOs, (self help groups and Non- Government organizations) state sponsored SC\ST organizations, education, housing and consumption loans for weaker sections.
In case of foreign banks operating in India, their advances to Export Sector are treated as priority sector advances. This criterion is not applicable to public sector banks. Since foreign banks are not allowed to open branches in rural/semi-urban areas, they are not in a position to lend to rural sector. Hence, this relaxation.
Over time the definition of priority sector advances has been widened to cover commercial banks' investment in special bonds issued by certain financial institutions like National Housing Bank for exclusive financing of priority sector.
The achievement of the set goals under priority sector lending has been pursued vigorously with banks by RBI. As a result of these efforts the public sector banks increased their advances to the priority sector Currently priority sector advances by commercial banks have crossed Rs.1,00,000 crore.
The efforts of public sector banks in rural development through priority sector loans are notable and admirable. It is one of the great achievements of Indian Banking system and nationalization of banks.
Priority Sector Lending Targets and Performance
The targets and sub-targets set under priority sector lending for domestic and foreign banks in India are as under:
Foreign banks in India
(1) Aggregate advances to priority sector
(2) Advances to agriculture
(3) Advances to weaker sections
(4) Advances to SSI
(5) Advances to Tiny Sector within SSI
(6) Export finance
(7) Advances under DRI Scheme
Newly set-up private sector banks have been permitted to substitute the agricultural lending, by contributions to deposits with NABARD \ SIDBI for a period of 3 years from the date of inception.
Available for units with investment in plant and machinery up to Rs. 5 lakh, 20% for units with investment between Rs. 5 lakh and Rs. 25 lakh and the remaining 40% for other SSI units.