ECOSENTIMENTS JOURNAL, VOLUME 1, ISSUE 1, 2013
NEW ECONOMIC POLICY AND PRIORITY SECTOR LENDING
MUKESH R Independent Researcher, Andheri (East), Mumbai
Abstract
Banking sector plays a pivotal role in the development of an economy. Like any other organization, banks also required to follow ethics and social responsibility since the environment in which they operate are subject to changes. Mass banking driven by pro-poor policies was a positive outcome of the nationalization of banks in India. Additionally, thrust was given to branch expansion, particularly in rural and semiurban areas. However, agriculture, small scale industries and the informal sectors have been the worst hit at the time of Narasimham Committees. The present paper examines the major changes in priority sector lending of Indian banks in the wake of new economic policies. Special focus has given to the small and medium scale industries for promoting equitable development. Small scale industries are one of the best employment providers in India and they need special care in priority sector lending. Furthermore, they are acknowledged as the recession-proof segment of the Indian industry. The critical role of the medium and small scale industries in employment generation, exports and economic empowerment of a vast section of the population has also been explored in the paper.
Key words: Priority sector, banks, recession.
INTRODUCTION The term ‘priority lending’ refers to the credit deployment of different segments of the Indian economy whose development is essential for the attainment of social justice. Initially, the priority sector was confined to agriculture, small scale industries 27
ECOSENTIMENTS JOURNAL, VOLUME 1, ISSUE 1, 2013 and exports. Later, small road and water transport operators, small business, professional and self-employed persons, education, housing and micro-credit was brought within the purview of bank lending.
The study group of the National Credit Council (1969), headed by D.R. Gadgil, suggested target oriented lending to different sectors of the economy. Mass banking driven by pro-poor policies was a positive outcome of the nationalization of banks in India. Banking services are now available in every nook and corner of the country so that credit gaps in the key sectors of the economy will not exist for a long time.
The new economic policy exerted a negative impact on the priority sector lending of banks in the country (Shajahan, 1998). The Narasimham Committee (1991) has underscored the gradual phasing out of the direct credit programme. The priority sector needs to be fixed at 10 per cent of the aggregate credit. As a result the rate of growth of credit to small enterprises has fallen by 22 per cent during 1991 as compared to the previous year (Venkataramany, 2009). Prior to liberalization, protection has been the most favoured strategy among small scale industries (Shastri et al, 2011).
The present paper has given much attention to the small and medium enterprises for promoting equitable development. Small and medium enterprises contribute 7 per cent to gross domestic product (GDP), constitute 34 per cent of national exports and provide employment to more than 30 million people. However, shortfall in demand from the public sector and intensified competition following liberalization policies has transformed the small scale enterprises into sick units (Priya, 2012). At the same time the employment potential of the industry is too large to deserve a place in priority sector lending.
PRIORITY SECTOR LENDING BY COMMERCIAL BANKS IN INDIA
The commercial banks played a significant role among the institutional sources of credit for priority sectors in India. The small scale industries are getting over from the ill-advised recommendations of Narasimham Committees. The Table 1 presents total
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ECOSENTIMENTS JOURNAL, VOLUME 1, ISSUE 1, 2013 bank credit and the deployment of bank credit to priority sector in India during 19972006. Table 1 Deployment of Bank Credit to Priority Sector in India Priority
March
March
March
March
March
March
March
March
March
March
Sectors
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
258991
300283
342012
400818
469153
536727
669534
764383
1040909
1445837
31442
34869
39634
44381
51922
60761
73518
90541
125250
172279
35944
43508
48483
52814
56002
57199
60394
65855
74588
90239
17494
21130
26494
34632
46490
57299
77697
107438
181638
247379
Total bank credit
Agricult ure & allied
Small scale industri es
Other priority sector
Source: Reserve Bank of India, Report on Currency and Finance, various issues
The outstanding bank credit of small scale sector increased from Rs.35944 crores in March 1997 to Rs. 90239 crores in March 2006 recording a 2.5 fold increase but the percentage share to total bank credit has declined from 13.9 per cent to 6.2 per cent. During the same period, the amount of bank advances to agriculture sector increased from Rs.31442 crores to Rs.172279 crores. There is a sudden jump of bank credit deployed to other priority sector during the period under consideration. The same has recorded an increase from Rs.17494 crores in March 1997 to Rs.247379 crores in March 2006. It can be argued that the growth of advances to other priority sector in absolute figure has bypassed the growth of bank credit to small sector although the percentage share has remained lower throughout the period. R K Uppal (2009), in his 29
ECOSENTIMENTS JOURNAL, VOLUME 1, ISSUE 1, 2013 study found that the priority sector advances of all commercial banks under different ownership increased but varied in achieving the targets among different groups under consideration.
Table 2 Performance of micro and small enterprises
Year
Number Units lakh)
of Production
Employment
(in (Rs. In Crore (in lakh) at
Export (Rs. In Crore)
2000-02
prices) 2002-03
109.49
306771
263.68
86013
2003-04
113.95
336344
275.30
97644
2004-05
118.59
372938
287.55
124417
2005-06
123.42
418884
299.85
150242
2006-07
128.44
471663
312.52
N.A.
Source: Economic survey 2007 to 2008, Ministry of Finance, GOI.
Table 2 shows the performance of small scale industries in India. The total number of SSI units was 109 lakh in 2002-03 of which 16 lakh were registered and 93.5 lakh unregistered. In 2006-07, the number of SSI units increased to 12.84 lakh of which 20.3 lakh were registered and 108.1 lakh unregistered. The output of these units was Rs.306771 crore in 2002-03 which rose to 471663 crore in 2006-07. The SSIs 30
ECOSENTIMENTS JOURNAL, VOLUME 1, ISSUE 1, 2013 provided employment to 263.7 lakh people in 2003-03 and to 312.52 lakh people in 2006-07. The export front from SSI sector was 86013 crore in 2002-03, which increased to 150242 in 2005-06. From the above data it is found that the percentage increase in number of SSI units was 17.31 per cent as against the corresponding employment of 18.52 per cent. Thus, the small scale industries are capable of providing more employment opportunities in order to cater to the weaker sections of the society.
CONCLUSION As the global economy nosedived into recession, it has been the need of the hour to review and redefine the priority sector advances of commercial banks. India being a labour-intensive country will have to specialize on the promotion of small scale industries and their exports. Small scale industries cannot be on a par with large companies if it is not supported by modern production practices. The potential of the industry is yet to be explored so as to curb the concentration of monopoly in urban areas.
REFERENCES 1. Ahmed, Jaymal Ud-din (2010): ‘Priority Sector Lending by Commercial Banks in India: A Case of Barak Valley’, Asian Journal of Finance & Accounting, Vol.2, No.1, pp.92-110. 2. Kaur, Jasmindeep and Silony (2011): ‘Performance Review of Commercial Banks in India with special reference to Priority Sector Lending: A Study of Post Reforms Era’, International Journal of Multidisciplinary Research, Vol.1, No.1, pp.47-61. 3. Shajahan, K M (1998): ‘Priority Sector Bank Lending: Some Important Issues’, Economic and Political Weekly, Vol.33, No.42/43, pp.2749-2756. 4. Shastri, Rajesh Kumar, Ravindra Tripathy and Murad Ali (2011): ‘Liberalization and its impact on small scale industries’, International Journal of Vocational and Technical Education, Vol.2, No.7, pp.81-83. 5. Solomon, Priya (2012): ‘What ails the MSME Sector in India? Is it Poor Access to Funds’, Ninth AIMS International Conference on Management, January 1-4, Pune.
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ECOSENTIMENTS JOURNAL, VOLUME 1, ISSUE 1, 2013 6. Venkataramany, Sivakumar (2009): ‘Globalisation of Entrepreneurship: Overwhelming Institutional Response in favour of SMEs in India’, International Business & Economics Research Journal, pp.131140. 7. Uppal, R K (2009): ‘Priority sector advances: Trends, Issues and Strategies’, Journal of Accounting and Taxation, Vol.1, No.5, pp.79-89.
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