With priority sector NPAs around three-fourths higher—as a proportion to total lending—than that for non-priority sector lending, it is clear India’s banking sector has a real problem. Not only does 40% of all bank credit have to be made to the priority sector, RBI has made it mandatory for new banks to open a fourth of their banks in non-banked rural areas. While the NPA ratio for priority sector lending is 5.42% for public sector banks, it is a lower 3.07% in the case of the non-priority sector. The comparison will get a little less unfavourable when you pencil in the restructured non-priority sector portfolio that is likely to turn NPA, but the larger point remains unchanged.
And that is banks are singularly unsuitable to meet priority sector needs as their appraisal systems are geared towards larger and more structured lending to the organised sector, and the sooner the government realises this, the better. NBFCs, micro-finance institutions and specialised lenders do this job better since they can actively mentor such borrowers. If banks were mandated to just lend to such institutions at discounted rates, that would work better—banks could then also focus more on larger loans and, hopefully, do a better job than they are doing right now.