Priority Sector Advances in

Indian Banking
Commercial Banking
PGP 2007-09
Term III, March-April 2008
 Chapter # 6
• Priority Sector broadly comprises

– Agriculture
– Small Scale Industries
– Others – Small Businesses, Retail Trade,
Small Transport Operators, Professional and
Self Employed Persons, Housing Loans,
Educational Loans, Micro Credit, etc.

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 Background
• National Credit Council – July 1968
• Lead Bank Scheme – 1969 (all 580 districts)
• Nationalisation of 14 Commercial Banks
• Description of PS formalised in 1972
(Informal Study Group on Statistics)
• Initially, no specific targets fixed
• November 1974 – RBI Guidelines to Banks
to raise the share of finance to PS in
aggregate advances to 33 1/3% by Mar 1979
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 Developments
• March 1980 – Priority Sector Advances
target raised to 40% by March 1985
• Sub-Targets also specified for lending to
– Direct Finance to Agriculture and
– Weaker Sections
• Details as per latest RBI Master Circular
• 2nd Nat’n of 6 Com’l Banks – April 1980
• Banking Sector Reforms – 1993 onwards
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 Targets under Priority Sector
Particulars Dom’ Banks Foreign Banks

Total PS Adv 40% of NBC 32% of NBC

Total Agri Adv 18% of NBC No Target

SSI Advances No Target 10% ofNBC

Export Credit Not included 12% of NBC

Adv to W S 10% of NBC No Target

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Priority Sector Advances Commercial Banking 2007 6
 Small Scale Industry?
• SSIs are those engaged in the manufacture,
processing or preservation of goods, and
whose investment in plant and machinery
(Original cost) does not exceed Rs. 1 crore.
• SSIs include units engaged in mining or
quarrying, servicing and repairing of
machinery.
• Ancilliary units – also investment not to
exceed Rs 1 crore to be treated as SSI
Priority Sector Advances Commercial Banking 2007 7
 SSI ... ...
• Investment of Rs. 1 crore enhanced to Rs. 5
crore in respect of certain specified items –
hosiery and hand tools by GOI

• Tiny Enterprises – investment in P&M upto

Rs. 25 lakhs, irrespective of location of unit

• SSSBEs – investment upto Rs. 10 lakhs in

Fixed Assets, Land and Buildings
Priority Sector Advances Commercial Banking 2007 8
 Classification of PS Advances
1. Agriculture
1. Direct Finance to Farmers
• Purchase of Agricultural Implements and
machinery
• Development of Irrigation Potential
• Reclamation and Land Development
• Construction of Farm buildings and structures
• Construction of Storage facilities
• Production and processing of hybrid seeds for
crops
• Payment of Irrigation charges
• Other types of direct finance – Short Term loans,
Medium Term loans (Plantations, Allied Activities,
etc)
Priority Sector Advances Commercial Banking 2007 9
 Classification of PS Advances...1
1.2 Indirect Finance to Agriculture
- Distribution of Fertilisers, pesticides, etc
- Electricity Boards
- PACS, FSS and LAMPS
- Deposits in Rural Infrastructure Dev Fund
- Subscription to bonds of REC / NABARD
- Others – Hire Purchase, Storage facilities...

Priority Sector Advances Commercial Banking 2007 10

Priority Sector Advances Commercial Banking 2007 11
 Classification of PS Advances...2
2. Small Scale Industries
• Small Scale and Ancillary Industries
• Tiny Enterprises
• Small Scale Service and Business
Enterprises
• Industrial Estates
• KVI Sector

Priority Sector Advances Commercial Banking 2007 12

 Classification of PS Advances...3
3. Other Activities / Borrowers
- Small Road and Water Transport Operators
- Retail Trade Advances
- Small Business
- Professional and Self Employed Persons
- State Sponsored Organisations for
Scheduled Castes and Secheduled Tribes
- Education / Housing / Indirect Finance
- Consumption Loans / Loans to SHGs / NGOs /
Micro Credit / Food and Agro-based Processing
Sector / Software Industry and Venture Capital
Priority Sector Advances Commercial Banking 2007 13
 Sec II – Certain Types ...
1. Investments in Special Bonds
• SFCs / SIDCs
• REC/NABARD/SIDBI /NSIC/NHB/HUDCO
• Lines of Credit
• Bills Re-discounting
• Deposits in RIDF
• Leasing and Hire Purchase

Priority Sector Advances Commercial Banking 2007 14

 Sec III – Targets for PS lending
• Main Targets – 40 % of Net Bank Credit
– 18 % of NBC to Agricultural Sector
– 10% of NBC to ‘weaker sections’

– 1% of previous year’s total advances under

Differential Rate of Interest (DRI) Scheme
(@ 4% pa interest; concessional terms; working
capital and term loans – below Rs. 10,000)

Priority Sector Advances Commercial Banking 2007 15

 Weaker Sections
1. SMF with <5 acres; landless labourers,
tenant farmers and share croppers
2. Artisans, Village / Cottage Inds – Rs 50,000
3. Swarna jayanti Gram Swarojgar Yojana
4. SCs / STs; DRI Scheme;
5. Swarna jayanti Shahari Rojgar Yojana
6. Scheme for Liberation and Rehabilitation of
Scavengers (SLRS)
7. Advances to Self Help Groups
Priority Sector Advances Commercial Banking 2007 16
 Targets for Foreign Banks
• Min lending to PS Advances – 32 per cent
• No branches in Rural Areas !
• PS include export credit provided by them
• Within the target – lending to SSIs should
not be less than 10% of NBC
• Export Credit should not be less than 12%
• Any shortfalls in targets – amount should be
deposited in bonds of SIDBI
Priority Sector Advances Commercial Banking 2007 17
 Sec IV – Common Guidelines
• Processing of Application Forms
– Completion of Forms
– Issue of Acknowledgement of Forms
– Disposal of Applications
– Rejection of Proposals
– Register of Rejected Applications
• Mode of Disbursement of Loans
• Repayment Schedule
Priority Sector Advances Commercial Banking 2007 18
 Sec IV – Common Guidelines...1
• Rate of Interest
• Inspection Charges
• Insurance against Fire and Other Risks
• Other Charges
• Photographs of Borrowers
• Discretionary Powers
• Machinery to look into Complaints

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 Recent trends in Bank lending to
Agriculture and SSIs

Priority Sector Advances Commercial Banking 2007 20

Priority Sector Advances Commercial Banking 2007 21
Priority Sector Advances Commercial Banking 2007 22
Priority Sector Advances Commercial Banking 2007 23
 RBI Data on Priority Sector loans

Priority Sector Advances Commercial Banking 2007 24

Advances to Priority Sector by PSBs – Progress
(Rs in Crores)
Sector June Mar 03 Mar 04 Mar 05 Mar 06
/ Year 1969
1.AGL 162 70,502 84,435 109,917 1,54,900
Direct 40 51,484 62,170 83,038 1,11,636
Indirect 122 19,017 22,265 26,879 43,264

2. SSI 257 52,646 58,311 67,800 82,492

3.OTH 22 71,197 96,170 125,114 1,64,473
4.TOT 441 199,786 2,44,456 307,046 4,10,379
5.NBC 3,016 485,271 560,819 717,419 1017,614
Priority Sector Advances Commercial Banking 2007 25
Advances to PS by Pvt Sector Banks
(Rs in Crores)
Sector March March March
2004 2005 2006
Priority Sector 48,920 69,886 1,06,566
(% to NBC) (47.3) (43.6) (42.8)
i. Agriculture 14,730 21,636 36,185

ii. SSI 7,590 8,592 10,447

iii. Other PS 25,786 38,797 58,243

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Priority Sector Advances Commercial Banking 2007 27
Priority Sector Advances Commercial Banking 2007 28
 Miscellaneous
• All PS loan applications upto Rs. 25,000
should be disposed off within a fortnight.
• Others within 8 to 9 weeks
• Loans upto Rs. 2 lakhs – Interest rate not
to exceed Prime Lending Rate (PLR)
• Monitoring by RBI – Through periodic
returns – Lead Bank Scheme – Review
Meetings at Block, Dist and State levels
Priority Sector Advances Commercial Banking 2007 29
 NABARD
• NATIONAL BANK FOR
AGRICULTURE AND
RURAL DEVELOPMENT
• ESTD IN 1982/MUMBAI
• DEVELOPMENTAL AND
REFINANCING
FUNCTIONS OF ARDC
(RBI)
• Comml/Coop/RR Banks
• www.nabard.org

Priority Sector Advances Commercial Banking 2007 30

 NABARD – 25 Years
• To provide focused and undivided
attention to the development of rural India
by facilitating credit flow for promotion of
agriculture and rural non farm sector
• NABARD's functions can be classified into
4 major categories viz. Credit Planning,
Financial Services, Promotion and
Development, and Supervision

Priority Sector Advances Commercial Banking 2007 31

 NABARD – 25 Years …
• Prepares Potential Linked Credit Plan (PLP)
annually for each district by assessing potential
available in agri and rural sector
• It has channelised Rs. 1,21,000 crore under
investment credit programme and RIDF
• Number of innovations - Self Help Groups (SHGs),
Farmers Clubs, Rural Infrastructure Development
Fund (RIDF), Watershed Development, Kisan
Credit Card (KCC), District Rural Industries Project,
Cluster Development Programme and Rural
Innovation Fund.
Priority Sector Advances Commercial Banking 2007 32
 SIDBI
• SMALL INDUSTRIES
DEVELOPMENT
BANK OF INDIA
• SUBSIDIARY OF
IDBI ……. IN 1990
• HQ IN LUCKNOW
• OFFICES ALL OVER
INDIA
• www.sidbi.in

Priority Sector Advances Commercial Banking 2007 33

 SIDBI - Mission
• To empower the Micro, Small and Medium
Enterprises (MSME) Sector with a view to
contributing to the process of economic
growth, employment generation and
balanced regional development.

• SIDBI offers Direct Finance, Bill Finance,

Refinance, International Finance, Micro
Finance, Other Schemes, Promotional
Activities and also accepts Fixed Deposits
Priority Sector Advances Commercial Banking 2007 34
 SIDBI Customers/Products
• SIDBI offers category-wise products to:-
– Institutions – Banks, SFCs, etc
– Investors
– Existing and New Entrepreneurs
– Existing Customers
– Women Entrepreneurs
– Micro Finance Institutions

Priority Sector Advances Commercial Banking 2007 35

 DICGC
• www.dicgc.in
• Insuring deposits with banks - first in 1948 after
banking crises in Bengal - reconsidered in 1949
• In 1950, Rural Banking Enquiry Committee also
supported
• Serious thought given by RBI & GOI after crash of
Palai Central Bank Ltd., & Laxmi Bank Ltd. in 1960
• Deposit Insurance Corporation Bill was introduced
in 1961 - Came into force on January 1, 1962
• Deposit Insurance Scheme was initially extended to
functioning commercial banks only (SBI and
subsidiaries, other banks and branches of the
foreign banks in India)

Priority Sector Advances Commercial Banking 2007 36

 DICGC …
• Extended to Cooperative Banks in 1968
• GOI / RBI introduced CGC in 1960
• CGO guaranteed advances granted by
banks and other Credit Institutions to SSIs
• On merger of DIC & CGS, Deposit
Insurance and Credit Guarantee Corporation
(DICGC) came into existence on July 15,
1978
• SSIs, Priority Sector Advances etc covered
from 1981 ………
Priority Sector Advances Commercial Banking 2007 37
 CGTSI Fund
• Govt of India, Ministry of SSI, launched the Scheme
to strengthen credit delivery system
• Credit Guarantee Fund Trust for Small Industries
was set up by GOI and SIDBI
• The lender should give importance to project
viability and secure the loan purely on the primary
security of the assets financed
• Renamed (BL 3/8/07) as Credit Guarantee Fund
Trust for Micro and Small Enterprises –
www.cgtmse.in – Based in Mumbai
Priority Sector Advances Commercial Banking 2007 38
 SMERA
• www.smera.in
• SME Rating Agency of India Limited (SMERA) is a
joint initiative by SIDBI (www.sidbi.in), Dun &
Bradstreet Information Services India Private Limited
(D&B) (www.dnb.co.in), Credit Information Bureau
(India) Limited (CIBIL) (www.cibil.com) and several
leading banks in the country in September 2005
• SMERA is the country's first rating agency that
focuses primarily on the Indian SME segment.
• SMERA's primary objective is to provide ratings that
are comprehensive, transparent and reliable. This
would facilitate greater and easier flow of credit from
the banking sector to SMEs.
Priority Sector Advances Commercial Banking 2007 39
 Kissan Credit Cards
• http://www.sbi.co.in/viewsection.jsp?lang
=0&id=0,8,66
• Kisan Credit Cards (KCC)
• Kisan Gold Cards Scheme

Priority Sector Advances Commercial Banking 2007 40

 Credit Cards for SSIs
• SMALL BUSINESS CREDIT CARD
• ARTISAN CREDIT CARD
• SWAROJGAR CREDIT CARD
• From SBI – www.sbi.co.in
• Other banks too

Priority Sector Advances Commercial Banking 2007 41

 Pop-group wise o/s credit of Com.
Banks in India (%age to Total) - RBI
Pop’Grp Mar’01 Mar’05 Mar’06 Mar’07
Rural 10.1 9.2 8.4 7.9

SUrban 11.5 11.3 10.0 9.7

Urban 16.8 16.4 16.4 16.2

Metro 61.6 63.1 65.3 66.1

All-India 5,564 11,578 15,175 19,496

(Rs Bn)
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