Impact of priority sector lending on Indian banks

Abstract

Reserve Bank of India has mandated the Scheduled Commercial Banks to lend a certain amount of their Loan Portfolio to Priority Sectors. These are the sectors which are considered important for the development of basic needs of the country by Government of India and RBI. The rational behind giving priority to these sectors is that these sectors have difficulty in getting institutional credit due to various reasons like low credit worthiness, high cyclicality, uncertain growth, etc. Hence entities operating in these sectors will either exit, thus reducing the sustainability of the economy or increase the cost of these goods, thus creating inflationary pressure.