study on impact of PSL on gross NPAS of nationalised banks: an empirical approach

Abstract

In order to encourage banks to lend more to neglected areas of the economy, the idea of a priority sector was introduced. These priority sectors add significantly to gross domestic product but have not received sufficient finance to function adequately. However, lending in the priority sector is not very warmly welcomed by the banks, particularly nationalized banks in India, as they generate more nonperforming assets than other sectors. It is the priority sector that contributes to the biggest default. As far as NPAs on account lending to the priority sector are concerned, it has been observed that there are inefficiencies in this sector, such that the fresh loans turning bad. Thus, our study examines the impact of non-priority sector loans on the rise of NPAs in the nationalized banks.

Priority and non-priority sector GNPAS in Indian commercial banks: a comparison between sub-sectors

“…Gaur and Mohapatra (2020) the repercussions of NPA provided by various private and public sector banks to various priority sectors for the period 2012–2017 and revealed that lending to priority sectors boosts GDP while having no effect on the NPA ratio. By using panel data analysis, Susena et al (2021) found that PSL and GDP have a positive link and a causal relationship that goes both ways. Using panel least square regression and ICICI Bank data over a 10-year period, Desai (2021) compares the sub-sectors within the priority sector and concludes that bank profitability is significantly impacted negatively by agriculture finance, whereas lending to other sectors and personal credit have no discernible influence.…”

“…To promote holistic development, the Central Bank of India (RBI) has identified banks as priority sector lenders, rather than concentrating only on the financial sector (Nagarajan, Sathyanarayana, and Ali, 2013). The term “priority sector” refers to industries that contribute the most to gross domestic production (GDP) but receive the least financial assistance (Susena et al , 2021; Singh et al , 2023). Priority sector lending’s (PSL) fundamental objective is to offer ignored sections of society sufficient and prompt finance at reasonable interest rates (Savitha and Kumar, 2016).…”

“…Because rising GNPAs have a detrimental effect on asset quality and profitability, they are a key source of concern for the banking sector. As a result, lending to priority sectors is widely regarded as the primary cause of rising GNPAs, which is frequently regarded as a “bad approach to achieving equality” because it generates GNPAs at the expense of supporting underserved parts of the economy (Susena et al , 2021). The Narasimham Committee II declared in 1998 that credit expansion to the priority sector is directly responsible for the deterioration of Indian commercial banks' asset quality (RBI, 2001).…”