Priority Scetor Lending, Non-Performing Assets and Profitability of Commercial Banks in India-

Abstract

The priority sector lending initiated in 1969 by Reserx e Bank o f India aims at providing bank credit at convenient terms to sectors like agriculture, small scale industries, weaker sections, small trading businesses, individual transport operators, etc. Over a period o f time, the concept has been broadened to include housing loans, educational loans, exports, etc. Banks operating in India are required to lend a certain percent o f their net bank credit to these sectors mandatorily. Their underachievement is penalized through the transfer o f funds to rural infrastructure development fund. However, the directed credit has contributed to the pool o f nonperforming assets o f the banks. More than half o f non-performing assets is generated from priority sector reducing the banks' profitability. The present study finds that public sector banks suffer more on account o f priority’ sector lending than other banks. Their return on assets and return on equity are lower than their peers. The study provides suggestions to strengthen the hanking sector and sustain the inevitable inter\’entionist policy like priority sector lending.