PhD SYNOPSIS

AN ANALYSIS OF THE IMPACT OF PRIORITY SECTOR LENDING BY

COMMERCIAL BANKS: A CASE STUDY OF STATE BANK OF INDIA (SBI)

IN TELANGANA STATE

By

K. DEVADAS

Submitted to the Department of Economics

Dean, Faculty of Social Sciences

Osmania University

Hyderabad, Telangana State

 AN ANALYSIS OF THE IMPACT OF PRIORITY SECTOR LENDING BY

COMMERCIAL BANKS: A CASE STUDY OF STATE BANK OF INDIA (SBI)

IN TELANGANA STATE

K. DEVADAS

INTRODUCTION

In the Schumpeterian framework of development, bank credit has an

immense role to encourage innovation in terms finding new products, new

markets, new technologies, new resources and new organization to initiate

development process. In the post-war development theory agriculture was

considered crucial for industrial progress. Even before independence there

was some concern on the part of the government and Reserve Bank of India

(RBI) for achieving synchronization of banking and credit policies with the

requirements of the economy. And “the special responsibility of the bank in

the sphere of agriculture credit made it some what distinct.”

Credit is a critical input for the development of rural areas, which is the

basic objective of all our planning. Credit has been provided by institutional

and non-institutional agencies. Institutional agencies comprised commercial

banks, regional rural banks, cooperative banks, farmers service societies

etc., whereas, non-institutional agencies comprised agricultural money-

lenders, professional money-lenders, traders, commission agents, friends

and relatives etc.,

One of the objectives of the nationalization of the major banks was to

help the priority sectors like agriculture, small scale industries and the export

trade. The post nationalization era of Indian Banking witnessed widespread

opening of branches in the rural areas. We are also witnessing the progress

of lead bank schemes, organization of the Credit Guarantee Corporation and

the swelling of deposits through the banks.

NEED AND IMPORTANCE OF PRIORITY SECTOR LENDING

Though the progress achieved at rural banking through the opening of

rural branches and the increase in the deposits can be attributed to the

success of the socialized banks, the other side of the coin, namely, the

progress in lending agriculture and small scale industries is far from our

expectations. The liberal lending to the ’common man’ in the initial years of

nationalization taught greater lessons when the banks had burned their

fingers.

Financing of priority sectors of the economy has been one of the

strategy of the commercial banks in their developmental roles in India. A

few years back the customer-banker relationship between the commercial

banks and some of the sectors of the economy which did not have certain

level of sophistication in their functioning could not be conceived. Banks

were used to certain level of sophistication in their physical appearance, staff

composition and attitudes and concept of economic activity. Only those who

could understand and reciprocate to this sophistication could think of

entering into a customer relationship with the commercial bank. This type of

working norm kept many sectors of the economy out of the bank’s direct

purview. Some of these sectors were too important to be ignored

considering their economic magnitude and social relevance, viz., agriculture

and people with modest means. In the changed context where the banks are

working as instruments of change the sectors hither-to neglected are viewed

as priority sectors which ordinarily did not use bank finance on a sizeable

scale. At the time of social control over commercial banks, special mention

was made to the supply of finance to agriculture and small scale industries

on a priority basis. The export sector, though traditionally neither weak nor

unfamiliar with the bank finance, was also included. Later, the self-employed

persons, transport operations and artisans were included in the priority

sectors. Financing for higher education and creating infrastructure for

industrial development, viz., industrial estates, were also treated as priority

sectors. At certain period when food procurement was treated as important

in the national interest, advances for food procurement were also mentioned

in the banks’ achievement under priority sector advances. In most of the

official documents, however, advances for food are excluded even from the

total advances while highlighting the priority sector advances. Under

agricultural advances the allied activities are included while plantations are

excluded.
 The priority sector at present, therefore, comprises of:

a) Agriculture and allied activities;

b) Small scale industry;

c) Small road and water transport operators;

d) Retail trade and small business;

e) Professional and self employed persons; and

f) Education.

STATEMENT OF THE PROBLEM

The national policy makers are involving the banking institutions in the

development of the Socially prioritized sectors through a variety of direct or

indirect measures consisting of direction, guidance, incentives, support and

some kind of compulsion as well. Four important policy measures have been

adopted for ensuring the flow of credit consistent with promoting the

interests of the producer and increase in production. These measures have

been evolved over a period of time in the form of;(a) giving priority to

certain sectors and sub-sectors, (b) special allocation of credit for the

specified sectors, (c) relaxation in the terms and conditions of credit to the

specified sectors, and (d) creating supporting system for ensuring the flow of

credit and its proper deployment.

The quantum of credit advanced by the commercial banks to the

priority sector, considering that they had entered the field only a decade

back, is quite impressive. Though the precise data about the credit advanced
to weaker sections in each sub-sector are not available, whatever figures are

available indicate that the weaker sections have a sizeable share in the total

number of accounts a well as amount outstanding. However, if the bankers

want to achieve greater impact on this sector, their coverage will have to be

quantitatively much larger and qualitatively much better.

On the other hand, bankers feel nervous about the extent of over dues

in the weaker section financing. Increase of over dues on the one hand and

policy maker’s expectations of the banker cover more and more of weaker

sections on the other hand, create confusion in the minds of general public

and nervousness in the grass roots level bankers. In many situations, a

mismatch is observed between the expectations of both borrowers and

lenders in terms of quantum, timing, adequacy, terms and conditions,etc.

The present study is an attempt to an analysis of the impact of priority sector

lending by commercial banks: A case study of State Bank of India (SBI) in

Telangana state

In order to avoid duplication in the research efforts and to identify the gaps if

any, a modest attempt is made to review the earlier studies.

REVIEW OF EARLIER STUDIES

K.M. Shajahan1 has opined that even though the percentage of priority sector

lending by public sector banks have surpassed the stipulated target of 40

percent to total advances it has possibly not resulted in the same amount of

1
K.M. Shajahan, “Priority sector bank lending: How useful ?, Economic and political weekly,
Dec.18th,1999 pp. 3572 - 3574
credit being actually channeled to the areas then considered to comprise

priority sector of the economy. The higher ratio achieved was possibly the

sequence of widening the scope of priority sector lending, which allowed

banks to park funds in new areas and even perhaps driven funds from areas

originally considered as constituting the priority sector. The areas newly

included in the priority sector, it is worth recalling, have among them RIDF-

IV even though it is suffering from gross underutilization. Also instead of

the oft-held argument that it is the high level of priority sector NPAs that has

pushed up the level of total NPAs of banks, it is actually the decline in priority

sector NPAs which has pushed down the total NPAs of banks. And out of the

total NPAs of banks, a major share (53.4 percent) is accounted for by NPAs

in the non-priority sectors which amounted to Rs.27,608 crore compared to

priority sector NPAs of Rs.22,067 crore in 1998-99.

Hrushikesh Bedbak2 has found that in the priority sectors the average

delay for credit is maximum (160 days) in LDB for marginal farmers, the

poorest with minimum land holdings and it is followed by 150 days delay in

commercial bank for small farmers and 150 days delay in SFC for small scale

and house hold industries. The minimum average delay in 35 days for credit

of medium farmers in cooperatives and 52 days for credit of small farmers

and 60 days for marginal farmers with minimum ACC for credit.

The vital reasons of delay in credit are;

1. Time consuming processing of credit application

2. Lack of coordination of agencies and concerned offices

2
Hrushikesh Bedbak “ Institutional financing for priority sectors-An empirical assessment of delay and
analysis of attitudes of agencies towards loanees”; Indian cooperative review, July,1986 pp 65-76
 3. Time taking investigation for recommendation, sanction and

disbursement of credit.

4. Postponement of credit processing work and slackness of employees

of agencies.

5. Absence of sincerity and seriousness of purpose of employees

6. Long distance of banks from the village.

7. Official apathy and lack of dedication to work.

8. Delay and unfair interest of investing and recommending authorities

like revenue, agriculture, veterinary, industry, block offices etc., in

processing the credit.

9. Interference of middlemen and politicians.

10. Inability to take independent decision of sanctioning officer.

11. The agencies are not conscious of time in processing the credit

application.

12. Absence of time sense in disbursing credit.

13. Postponement of decision and disbursement of credit.

S.S. Mallikarjuna Rao and K.V. Narayana3 has found that the credit flow of

the financing institutions has been growing significantly falling in line with

Reserve Bank of India guidelines with regard to credit policy. There is

growing tendency among the rural poor to avail institutional finance for

various activities under priority sector, consequently reducing the role of

traditional money lender.

3
.S. S. Mallikarjuna Rao and K.V. Narayana; “Institutional finance for priority sector: an analysis;
Kurukshetra, December,19; pp 30-36
 Among various sectors identified under priority sector, agriculture

is recognized as most important sector. There has been an increasing

tendency both in targets and achievements of agricultural sector showing the

credit needs of this sector. It is an indication to say that there is still gap

between the credit needs and the advances. Similarly, the performance is

encouraging with regard to finance to other sectors and small scale industries

due to urban oriented activities and awareness among entrepreneurs.

The other activities under priority sector like allied activities to

agriculture and rural cottage industries have been given less importance. As

already noted earlier these two activities provide employment to a significant

proportion of rural poor. ie., marginal farmers, landless labourers, rural

artisans etc., It is suggested that these activities may be given sufficient

attention to provide credit-flow. Over the years the financial institutions

have increasingly involved in financing to agriculture, activities allied to

agriculture and other rural development programmes.

The review shows that their involvement in the field of priority sector

has improved quantitatively and qualitatively. Considering the predominant

position occupied by this sector in the economy, banks will have to ensure

that still a larger portion of their advances are deployed to this sector.
 J.V. Prabhakara Rao4 has raised some issues with regard to priority

sector lending by commercial banks which include;

1. The classification of priority sector advances in somewhat broad

based and under the existing scheme, even large borrowers secure

benefit of priority treatment in obtaining bank credit.

2. Again it is also desirable to identify certain ‘preferred sectors’ within

priority sector to whom special attention has to be paid. Separate

targets for lending under preferred sectors may be laid down and

these norms may be gradually enlarged over a period.

3. In order to meaningfully deploy funds for the desired rate of growth

and development of priority sectors, some policy decisions have to be

taken to avoid duplication of the effort on the part of different lending

institutions. Credit is going where credit is already available in plenty.

Today, there are co-operatives, commercial banks and regional rural

banks in the country functioning simultaneously in the field of

agricultural credit. This has created problems for the efficient

disbursal of credit. Hence, there is an urgent need for the

demarcation of operational areas.

4. While granting credit under priority sector advances to small scale

industries, little attention is paid to the marketability of the products.

It is essential to examine before granting credit whether the

production of so many units set up would really command ready

market in the districts or outside the district and what arrangements

4
J.V. Prabhakara Rao, “Priority sectors lending by commercial banks – some reflections”; Southern
Economist, July 15,1993 pp-23-24
 are available to reach the market. I is here that the question of

identifying and estimating the size of the market comes up. Will the

local marketers absorb the increased production? If not, If so, how

much? If not, where can the increased production be sold? These

questions have to be answered satisfactorily in order to see that the

credit granted to small units is purposefully utilized. Mere provision

of subsidy is not sufficient and the number of units to be financed

should not be decided by the availability of funds to be disbursed by

way of subsidy but by considerations of the market and institutional

and infrastructural support available to support the activities.

5. It is stated that banks have been asked to attain a level of 40 percent

credit to priority sector before 1985. Though the objective is

laudable, in principle, it may produce some undesirable effects. In

their anxiety to reach the target, banks may resort to indiscriminate

lending which may result in a higher percentage of bad advances.

This also may reduce the quantum of credit that is available to other

important sectors of the economy. Hence, steps must be taken o see

that there is no unnecessary diversion of credit for the sake of

fulfilling the targets.

B.K. Sarkar5 has analyzed that judged from the marketing angle the

look of the bankers plays a none-too-insignificant role in securing the

acceptance of the banks by the target group in the rural areas. So far, the

5
B.K. Sarkar, “Banks marketing for the target groups in the priority sector:”; Prajna, vol.12,1983 pp 315-
325.
rural people used to regard the village money-lenders as their own men.

Hence, what is needed is a limited rustication of the highly sophisticated

image of the nationalized banks operating in the countryside, so that they

could accept the banks as their institutions.

Therefore, he suggested to launch a successful marketing drive for the

target groups in the priority sector, the environment pertaining to each

segment of the society has to be carefully scanned and vital information

relevant to marketing decisions, such as ignorance, unwillingness, poverty

and political interference, etc., have to be analysed. Unless the customer

and his problems are properly comprehended, and his real need situation is

assessed in a meaningful way and property held out to him with a view to

extending matching benefits in a corresponding manner, the “account” or

loan given to the customer is sure to be rendered “sticky” (unrecoverable)

or the unit (venture) “sick”.

K.V.Patel and N.B.Shete6 have estimated that thirty nine percent of the

borrowers in agriculture and allied activities and 19 per cent of the borrowers

in trading sectors had repaid 95 to 100 per cent of their dues. At least half

of the total dues was repaid . 49 per cent of the trading loans. Only 5 per

cent of the processing loans, 10 per cent of the agricultural loans and 17 per

cent of the trading loans were completely defaulted during the period.

6
K.V.Patel and N.B.Shete, “Some aspects of recovery of loans of weaker sections under priority sector
lending”; Prajna, pp-77-96
 It needs to be emphasized that the recovery performance of loans in

priority sector and more so in weaker sections is a function of two variables,

viz., incremental income from the activity financed by the bank, continuous

supply of bank credit, i.e., assurance of availability of credit once repayment

is made . All the partners in the development process, viz., credit suppliers,

credit users, and suppliers of other inputs i.e., credit.

RBI Bulletin 7pointed out that the aggregate level, about 5 percent of

SC/ST population in the country benefited by the priority sector advances of

SCBs during 1987, In the case of half of total States/UTs in the country, this

percentage was lower than 5 per cent. The number of beneficiaries was

minimum (0.6 per cent) from Dadra and Nagar Haveli and maximum (17.2

per cent) from Chandigarh. In the case of nine States/UTs mostly belonging

to Northern Region & Western Region, the percentage was between 6 and 8.

For two states, namely, Andhra Pradesh and Karnataka, it was around 10 per

cent and for four States/UTs /Chandigarh, Goa, Daman and Diu, Kerala and

Pondicherry) it was between 15 and 17 per cent.

GAPS IDENTIFIED IN THE EARLIER STUDIES

1. No study made an attempt to identify the economic progress of the

beneficiaries attributable to priority sector lending.

2. Most of the studies are macro and aggregate in their nature.

7
RBI bulletin, “Disbursal of priority sector advances of scheduled commercial banks to scheduled castes
and scheduled tribes – a review” ; 1990, Vol.44- No.-1-3
 3. No study made an attempt to identify the expectations of the

beneficiaries with regard to priority sector lending.

4. No study made an attempt to compute the project specific benefits

identified with priority sector lending.

OBJECTIVES OF THE STUDY

1. To examine the socio economic and demographic characteristics of

the beneficiaries of priority sector lending by SBI in Telangana state.

2. To estimate the relationship between income and credit under priority

sector lending.

3. To study the project specific benefits attributable to priority sector

lending by SBI in both pre and post priority sector lending settings.

4. To examine the problems and expectations of the beneficiaries of

priority sector lending through SBI.

5. To suggest measures and programmes to strengthen the function of

priority sector lending in Telangana state.

HYPOTHESES OF THE STUDY

1. The relationship between income and credit through priority sector

lending is assumed to be insignificant.

2. The impact of priority sector lending is size neutral.

METHODOLOGY
 Towards the end of the objectives and hypotheses the following

methodology will be adopted.

SAMPLE DESIGN

For the purpose of present study 500 sample respondents will be

selected from Karimnagar and Warangal districts covered under SBI’s priority

sector lending scheme mostly by adhering to principles of stratified random

sampling.

SOURCES OF THE DATA

The present study will make use of both primary and secondary

sources of data.

The secondary sources of data will include the annual reports of SBI,

reports published by District Planning Officer and the Lead Bank Officer of

districts concerned.

The primary data will be collected directly from the respondents by

canvassing questionnaire/schedules which are designed and pre-tested.

PERIOD OF THE STUDY

In order to estimate the impact of liberalization on priority sector

lending, the period of 15 years (2000 to 2015) will be considered.

To measure the impact of priority sector lending on the beneficiaries a

period of 5 years from the year 2010 to 2015 will be considered.

SCOPE OF THE STUDY

Although the scope of priority sector lending is very wide and

comprehensive the present study limits itself to the study of five programmes

covered under priority sector lending viz., Weaker sections financing. The

scope is further limited to measure only the tangible benefits of priority

sector lending and intangible benefits could not be covered.

TECHNIQUES OF ANALYSIS

Simple percentages, frequency distribution, growth rate, Chi-

square statistic, simple regression techniques, trend equation will be

employed in order to estimate and test the significance of relationships

specified in the present study.

BIBLIOGRAPHY

1
K.M. Shajahan, “Priority sector bank lending: How useful ?, Economic and political
weekly, Dec.18th,1999 pp. 3572 – 3574
2
Hrushikesh Bedbak “ Institutional financing for priority sectors-An empirical
assessment of delay and analysis of attitudes of agencies towards loanees”; Indian
cooperative review, July,1986 pp 65-76
3
.S. S. Mallikarjuna Rao and K.V. Narayana; “Institutional finance for priority sector: an
analysis; Kurukshetra, December,19; pp 30-36
4
J.V. Prabhakara Rao, “Priority sectors lending by commercial banks – some
reflections”; Southern Economist, July 15,1993 pp-23-24
5
B.K. Sarkar, “Banks marketing for the target groups in the priority sector:”; Prajna,
vol.12,1983 pp 315-325.
6
K.V.Patel and N.B.Shete, “Some aspects of recovery of loans of weaker sections under
priority sector lending”; Prajna, pp-77-96
7
RBI bulletin, “Disbursal of priority sector advances of scheduled commercial banks to
scheduled castes and scheduled tribes – a review” ; 1990, Vol.44- No.-1-3