Column : Need to rethink priority sector lending

A major issue confronting our financial system is the quality of assets. This has been exacerbated by the economic downturn, which is typically when loans stop performing. While restructuring is a way out for some cases, it poses conundrums for the lending institution as well as the regulator. An issue that comes up here is asset quality and priority sector lending. So far, with all the talk of inclusive growth, there are fixed norms for lending to vulnerable sectors. But, if one looks beyond the conventional commercial banking system, this problem is even scarier.

Within commercial banks, a little less than half of the non-performing assets (NPAs) originate in the priority sector (whose share in total credit is around 31-33%), and given that this sector is held sacrosanct, seldom do bankers raise objections and instead defend the concept as being necessary. In FY12, 4.4% of outstanding priority sector advances were classified as non-performing, while the same for non-priority sector was 2.4%. Further, growth in these NPAs was much higher than that in loans to this sector. Clearly, there are problems associated with such finance.

The accompanying table provides the picture of NPAs for various cooperative banks that are seldom analysed, which provide support to the rural economy and the small & medium enterprise (SME) segment.

The table shows that we have a large network of cooperative banks in the urban and

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