Banks are likely to fall short of their priority sector lending targets in 2011-12. As on March 23, 2012, the proportion of priority sector lending of banks was down at 32.7 per cent against 33.7 per cent a year ago, according to data available on Reserve Bank of India Web site.

Priority sector includes loans to agriculture and allied activities, small-scale industries, poultry and other core economic activities in rural areas, including loans to microfinance institutions.

According to RBI mandate, domestic banks have to lend at least 40 per cent of their total loans to the priority sector. For foreign banks, the target is set at 32 per cent of net bank credit.

The figure of 32.7 per cent has been arrived at a calculation based on the gross credit level. The ratio could be slightly higher at the net bank credit level, however, it might not be adequate to bridge the gap (as in meet the target of 40 per cent).

Though there is no bank wise data available for priority sector lending performance last year as yet, however, a number of banks have been falling short of this target. Infact, priority sector lending as a percentage of gross non-food credit is at a multi-year low, as indicated by the RBI data.

Reasons

According to senior bank officials, the drop is mainly on account of a slowdown in lending to the core agriculture sector on the back of rising non-performing assets (NPA).

NPAs in the agriculture loan, which accounts for majority of priority requirement (18 per cent), were high at 3.3 per cent in 2010-11. The NPAs may have risen further during the current fiscal on account of crop failures and instances of wilful defaults.

While the data is not available for the banking system as a whole, however, SBI's agriculture NPAs to total agriculture advances had risen by more than three percentage points to 9.45 per cent during the nine months ended December 2011.

Banks exposure to microfinance institutions have also come down significantly following the recent crisis in Andhra Pradesh, which brought down the repayment rates.

This apart, the declassification of farm credit by RBI in July last year and the recent diktat from the central bank to reduce banks' exposure to NBFCs including those lending against gold have only added to the woes of banks, said Mr D Sarkar, chairman and managing director, Union Bank of India.

In 2010-11, seven public sector banks, three foreign banks and a private bank missed the overall priority sector lending target. However, banks made good for this by lending to other avenues such as on-lending to non-banking finance companies, securitisation and demand from micro-finance companies.

In 2011-12, however, this looks slightly difficult to achieve with direct lending to NBFCs ceasing to be classified as priority lending, said Ms Vibha Batra, senior vice-president and co-head, ratings, ICRA.

Interestingly, banks have significantly stepped up their lending to agriculture sector in the month of March (2012). In a month, lending to priority sector (including agriculture) went up by 10 per cent and accounted for 65 per cent of the incremental bank credit during the month. .

> shobha@thehindu.co.in

> mvssantosh@thehindu.co.in

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