Banks With More Physical Presence Are Better Placed To Lend Priority Credit, Says RBI Study

Banks With More Physical Presence Are Better Placed To Lend Priority Credit, Says RBI Study

A study conducted by the Reserve Bank of India indicates that banks with greater brick-and-mortar presence are better placed to extend priority credit at the grass-roots level, the central bank staff paper said on Friday. 

The study also showed higher PSL growth proved to improve banks’ overall asset quality.

In India, priority sector lending has been used as a policy intervention tool to direct credit to the needy sectors of the economy.

This article titled 'Priority Sector Lending: The Indian Experience' evaluates the commercial viability of such loans and their impact on the overall financial health of banks using quarterly bank-level data from March 2006 to March 2023.

The cross-country evidence suggests that directed lending programs with a strong institutional framework, strict performance standards, and effective monitoring are generally successful, the RBI's bulletin for September said and does not necessarily reflect the views of the central bank.

Although PSL is mandated by regulatory requirements, banks take into consideration the usual risk-return trade-off when extending these loans. 

"Wider bank reach, measured by bank branches-to-assets ratio, is positively associated with a higher share of loans disbursed to the priority sector," the RBI paper said.

The analysis of this article suggests that Indian banks’ PSL share is influenced by the asset quality of their priority sector portfolio.

In the agriculture and micro small enterprise PSL specifications, rural branches-to-assets ratio and urban branches-to-assets ratio, respectively, have been used as explanatory variables, the RBI paper said. 

While the study results suggest that banks with a bigger branch network in urban areas lend a greater share of their loans to priority MSEs, they are not significant for priority sector agricultural loans for banks with a higher rural presence.