Impact of priority sector lending in india
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Impacts of The Directed Lending/ Psl on The Banking Sector And The Economy-
The advocates of PSL claim that it lifts up the weaker sector which the market forces usually fail to do. It is also claimed that PSL results in social returns and improved lending portfolios of the banks. The directed lending allows the commercial banks to generate high social returns along with the profits and it also contributes to economic development by increasing investment in the strategic sectors, like exports. Most important of all, from the viewpoint of public policy, the directed lending promotes social equity and facilitates increase in employment and investment in less developed regions and the vulnerable sections of the society. The opponents, on the other hand believe that it diverts funds from the productive sectors, imposes economic burdens on the banks in the form of loan losses and payment defaults and also imposes opportunity costs of lending to non-priority sectors of the economy. These negative effects are increased transaction costs, increased NPAs and the decreased deposit mobilization. Since the subsidized nature of loans under the directed credit forces the banks to pay lower interest rates on deposits, this makes the deposits a less attractive avenue for the people which ultimately impacts the banks. In cases like India, where the capital markets are not much developed and multiple demands of credits arises from various sectors, these quantitative targets based on the proportion of gross advances effects lending to equally important sectors such as infrastructure.
The advocates of PSL claim that it lifts up the weaker sector which the market forces usually fail to do. It is also claimed that PSL results in social returns and improved lending portfolios of the banks. The directed lending allows the commercial banks to generate high social returns along with the profits and it also contributes to economic development by increasing investment in the strategic sectors, like exports. Most important of all, from the viewpoint of public policy, the directed lending promotes social equity and facilitates increase in employment and investment in less developed regions and the vulnerable sections of the society. The opponents, on the other hand believe that it diverts funds from the productive sectors, imposes economic burdens on the banks in the form of loan losses and payment defaults and also imposes opportunity costs of lending to non-priority sectors of the economy. These negative effects are increased transaction costs, increased NPAs and the decreased deposit mobilization. Since the subsidized nature of loans under the directed credit forces the banks to pay lower interest rates on deposits, this makes the deposits a less attractive avenue for the people which ultimately impacts the banks. In cases like India, where the capital markets are not much developed and multiple demands of credits arises from various sectors, these quantitative targets based on the proportion of gross advances effects lending to equally important sectors such as infrastructure.
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