Determinants of Priority Sector Lending: Evidence from Bank Lending Patterns in India

Abstract

Mandatory directed credit or priority sector lending (PSL) is part of the regulatory framework for commercial banks/financial institutions in many countries, both developing and developed. However, compliance and lending effectiveness of such programs may be determined by a host of factors. This may be particularly so in developing countries, where availability of finance for the vulnerable sectors like agriculture, small businesses, weaker sections, is scarce. The present paper aims at examining the patterns of priority sector lending by banks, with a view to identifying the factors which determine this lending, and implementation challenges for lending by banks in such programs. The paper is based on an analysis of secondary data relating to priority sector lending (1998-2014) for eighty banks in India, and is supported by findings from the survey of ninety-seven lending officers of various banks. The results indicate gaps in patterns of the sect oral target compliance by different bank groups, along with the lending preferences and challenges faced by banks in such lending. It also identifies bank-specific characteristics like the nature of ownership, size, performance, etc., which have a significant impact on the priority sector lending patterns. Based on its findings, the paper offers policy suggestions for improving the effectiveness of priority sector lending program.

Keywords: G21, G34, O16

JEL Classification: Banks, Directed Credit Program, Priority Sectors, Bank Ownership, Small Business Credit