Factors impacting geographical distribution of directed lending: a study of Indian banking

Mandatory directed credit program (DCP) or priority sector lending (PSL) program, which is part of the regulatory framework for commercial banks/ financial institutions in many countries, presently focusses mainly on achieving the national objective of balanced sectoral development. With a small change in the guidelines, it can also be made an effective instrument for reducing geographical inequalities in any federal structure of government. Since the program involves a significant proportion of the economy’s resources and has a social objective to serve, its use should be optimal and in alignment with the current national priorities. The present paper therefore, aims at examining the patterns, preferences and challenges of directed lending by banks across various states in India, with a view to identifying state specific characteristics, which may impact its distribution, and to thereby offer policy suggestions for strengthening the program. The paper is based on an analysis of secondary data relating to priority sector lending (1999-2013) for thirty-five states and Union Territories in India, and is supplemented by the findings of a survey of ninety-seven lending officers of different banks. The results indicate notable disparity in PSL across various states and regions in India. They also identify state specific characteristics like its level of economic development, urban orientation, agrarian/industry oriented economy, and bank penetration, which have a significant impact on its per-capita PSL amount. The findings thus, indicate that contrary to the objectives, the economically advanced states are receiving higher per-capita PSL amount. Based on its findings, the paper offers policy suggestions to enable a more equitable regional flow of priority lending and to thus, serve the achievement of national policy objective of balanced geographical development through the Directed Credit Program of a country.