Reluctant PSBs: Issues of commercial viability, old and new, restrict their performance.

Abstract

Finance Minister Arun Jaitley has prodded public sector banks (PSBs) to lower lending rates, consequent to the RBI lowering the signalling rate of interest. The reluctance on the part of PSBs can be understood by analysing critical factors that influence their commercial viability. Some of these issues, such as rising non-performing assets (NPAs) and uncertainty in global and domestic markets, have been extensively discussed. But factors crucial to the debate, like priority sector lending, reserve ratios and the financial costs of the Jan Dhan Yojana, have been ignored.

The provision of priority sector lending can be traced to 1967 when, in view of two years of severe shortfall in agricultural output and slowdown of industrial production, the flow of credit to agriculture, exports and small-scale industry (SSI) was liberalised on a selective basis. Around the same time, the government had initiated steps to institute social control of banks and promote purposive distribution of credit, consistent with basic economic and social objectives. To rectify the persistent trend of extending loans exclusively to large industries and business houses, priority sector lending was devised. At a meeting of the National Credit Council in July 1968, it was emphasised that commercial banks should increase their credit to agriculture and SSI. The social control measures took effect from February1969, and bank lending was considerably reoriented with the nationalisation of major commercial banks in July 1969. By November 1974, PSBs were advised that no less than one-third of aggregated advances were mandated for the priority sector. Read more at: https://indianexpress.com/article/opinion/columns/reluctant-psbs/