Slow growth in disbursement of loans to the priority sector has been a drag on the overall credit expansion of banks in the just concluded financial year.
The year-on-year growth in priority sector advances was 5.5 per cent till February 2012, compared with 20.1 per cent a year ago. This seemed to be the primary cause for the slump in banks' loan growth, which fell to a two-year low of 15.6 per cent in February, bankers said.
While reduced investment activities and uncertain economic environment had a cascading impact on banks' credit expansion in 2011-12 (April-March), economists and industry analysts felt a slow growth in priority sector loans intensified the brunt.
According to current norms, 40 per cent of banks’ advances should be to the priority sector, which includes agriculture, micro and small enterprises, education and housing. Within this, agriculture and allied activities should receive 18 per cent of the bank loans.
"It is the priority sector lending that has been a drag on the overall growth of credit. This implies that banks have significant ground to cover to meet their priority sector lending quotas in March 2012. Further, for the non-priority sectors, the key segments associated with the investment cycle continued to show robust growth," Anish Tawakley, director at Barclays, said.
The year-on-year credit growth excluding priority sector advances fell to 20.4 per cent in February, 2012 from 24.3 per cent a year earlier, according to data released by the Reserve Bank of India (RBI). Bankers said growth in non-priority sector loans was driven by past sanctions that were now getting disbursed.
Within the priority sector loans, which expanded by 5.5 per cent, the pace of growth in non-farm credit was slow at four per cent while the year-on-year expansion in agriculture advances was at 8.1 per cent till February 2012.
“Typically, in the last quarter of every financial year, we see banks step-up their priority sector lending to meet their targets. In 2011-12, because of the tight liquidity and high cost of funds, there was no rush to meet priority sector targets till February. Also, there were expectations that liquidity tightness will ease in March. Priority sector lending started happening mostly from end-February," said an economist with a foreign bank.
A few bankers even suggested banks were awaiting action on the Nair Committee's report on priority sector lending before lending aggressively to this sector.
Not many bankers were willing to speak on this topic openly, because of the sensitivity surrounding priority sector loans. On condition of anonymity they agreed many banks were likely to miss their priority sector lending target in the last financial year. "In just one month, lending cannot be increased so sharply. Hence, it is possible many banks will miss their target,” a senior executive of a Mumbai-based public sector bank said.
The marginal recovery in loan growth to 17 per cent in March, 2012 was partly due to higher priority sector lending, but more because domestic companies were moving away from foreign currency advances and opting for rupee loans, bankers and economists said.
According to them, companies were drawing down their credit limits with banks towards the end of the financial year, to avoid any cut in their limits in the current year. This also aided in the modest revival in credit growth in March.