ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Credit Support to Priority Sectors-A Macro Perspective

Credit Support to Priority Sectors A Macro Perspective N A Mujumdar THERE are at least three reasons why at this point of time, a fresh look at the issues pertaining to the flow of credit to priority sectors is warranted. First, the period 1991-96, constituting the first phase of financial sector reforms was a period of 'policy vacuum' so far as priority sectors are concerned. Commercial banks defaulted merrily on the priority sector credit target of 40 per cent of net bank credit, as also on the subtarget of 18 per cent credit to agriculture. The size of credit flowing to the small-scale industries sector also shrank. The Reserve Bank of India (RBI) winked at the default and maintained a studied silence on the default till July 1996, when the UF government announced, in its first budget, a number of initiatives to accelerate the flow of rural credit. At long last, public sector banks managed to achieve the credit target only in 1996-97, While credit to priority sectors at 41.7 per cent of net bank credit exceeded the target, the subtarget continued to remain unfulfilled. Credit to agriculture was at 16.4 per cent, What is more, the reform package has affected adversely the apriority sectors in another area, namely, interest rates: with the freeing of banks' lending and deposits rates, the new interest rate structure that has emerged, has become highly regressive and is biased against priority sectors. Secondly, the Approach Paper to the Ninth Plan (1997-2002) does accord high priority to agriculture and rural development activities in general, in the strategy for future growth. It is therefore only appropriate that, monetary and credit policies would need to be modified in such a manner that they are in broad alignment with the priorities of the Ninth Plan, Looked at from this angle, credit policy has yet to react to the Ninth Plan priorities. The question that therefore needs to be considered is: what are the ingredients that need to be added to the credit policy mix? Thirdly, winds of change appear to be blowing in the RBI in the post-November 1997 phase. The RBI appears to have recovered from its amnesia of rural credit; the setting up in December 1997 of two high-level one-man committees to look into the problems impeding the flow of credit to agricultural and small-scale industries sectors, respectively, is a concrete demonstration of this change. The resurrection of the RBI's involvement in rural credit thus marks the end of the 'policy vacuum' phase.

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