Increased focus on rural India: For first time, loans to weaker sections surpass credit to companies

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MUMBAI: Bank loans to the weaker and deprived sections surpassed credit to the corporate sector for the first time, in part due to the government’s increased focus on rural India and also as a result of a slowdown in demand and the cautious approach of banks towards lending to companies.

The so-called priority sector lending comprised 34% of total loans compared with 32% for corporates at the end of January, Reserve Bank of India data on sectoral deployment of bank credit showed. Outstanding loans to large industries amounted to Rs 21.3 lakh crore as of end January, compared with Rs 22.7 lakh crore to the priority sector.

“The credit offtake reflects changes in economic activity. The fall in loans to large corporates reflects weak demand for credit, and the fall in outstandings due to UDAY (Ujwal Discom Assurance Yojana) discom bonds, shift to corporate bonds and a drop in working capital,” said Saugata Bhattacharya, chief economist, Axis Bank. “A sharp rise in credit to weaker sections is likely due to increased lending to self-help groups for onward lending. This shows intent by banks to increase funding for the unfunded.”

Companies are increasingly tapping other sources such as the bond market for funds as it has become cheaper and easier for them than taking bank loans. Banks are also trying to get rid of problem loans from their books. “Banks are in the process of cleaning up their balance sheet because of which loans to large corporate have shrunk,” said SK Ghosh, group chief economic adviser, State Bank of India. As for priority-sector lending, RBI has revised the definition of weaker section to include a number of entities including loans to minorities. The definition was widened recently to include overdrafts under the PM Jan Dhan Yojana (PMJDY), said Ghosh. “Banks are comfortable giving overdrafts to good accounts under PMJDY. This may have contributed to the surge in priority sector loans.”

Overdrafts under PMJDY are part of loans to weaker sections under priority sector and these loans account for 23%, or Rs 5 lakh crore, of the priority sector portfolio, up from 21% two years ago. Over 25 crore accounts have been opened under PMJDY and the cumulative overdrafts have aggregated to Rs 320 crore. The percentage of zero-balance accounts fell from over 75% in September 2014 to around 25% now, which qualifies more number of households for bank overdrafts.