At a meeting of the National Credit Council held in July 1968, it was emphasized that commercial banks should increase their involvement in the financing of priority sectors like agriculture and small scale industries. The description of the priority sectors was later formalized in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines were issued in this connection indicating the scope of the items to be included under the various categories of priority sector. Although initially there was no specific target fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 per cent by March 1979. At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sectors to 40 per cent by March 1985. Subsequently, on the basis of the recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programmed by Banks, all commercial banks were advised to achieve the target of priority sector lending at 40 per cent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups. On the basis of the recommendations of the Internal Working Group, set up in Reserve Bank to examine, review and recommend changes, if any, in the existing policy on priority sector lending including the segments constituting the priority sector, targets and sub-targets, etc. and the comments/suggestions received thereon from banks, financial institutions, public and the Indian Banks’ Association (IBA), it has been decided to include only those sectors that impact large segments of population & the weaker sections, and which are employment-intensive, as part of the priority sector.
v PRIORITY SECTOR LENDING
IntroductionThe Government of Pakistan through the instrument of Reserve Bank of Pakistan (RBP) mandates certain type of lending on the Banks operating in Pakistan
Export finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Pakistan
v OBJECTIVES OF PRIORITY SECTOR LENDING
Following are the objectives of priority sector lending
· To improve the economic condition of the country.
· To facilitate the community by direct and indirect financing
· For the setup of more industries in the countries
· Reduction of mandatory credit to a larger number of sectors and sections, including marginal farmers, cottage industries, small trade and services and low income housing; incentives
· To improve credit flow to small-scale industries and food crop agriculture as well as temporary credit
· To assure credit to new industries and new professions by the non-poor section.
v PRIORITY SECTORS FOR LENDING
The priority sectors for all scheduled commercial banks are as under:
· Agriculture loan
· Small Scale Industries
· Small Business / Service Enterprises
· Micro Credit
· Education loans
· AGRICULTURE
Direct finance
These include short, medium and long term loans given for agriculture and allied activities directly to individual farmers, Self-Help Groups or Joint Liability Group of individual farmers without limit and to others such as corporate, partnership firms and institutions.
Indirect finance
To agriculture shall include loans given for agriculture and allied activities as specified in Section I, appended.
· SMALL SCALE INDUSTRIES
Direct Finance
it include all loans given to units which are engaged in manufacture, processing or preservation of goods.
Indirect finance
These loans include finance to any person providing inputs to marketing
Or output of artisans, village and cottage industries, handlooms and to cooperatives of producers in this sector.
· SMALL BUSINESS / SERVICE ENTERPRISES
These loans include small business, retail trade, professional & self employed persons, small road & water transport operators and other service enterprises and other enterprises that reengaged in providing or rendering of services.
· MICRO CREDIT
Provision of credit and other financial services and products of very small amounts not exceeding Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas, either directly or through a group mechanism, for enabling them to improve their living standards, will constitute micro credit.
· EDUCATION LOANS
Education loans include loans and advances granted to only individuals for educational purposes for studies in Pakistan
· HOUSING LOANS
Loans for construction of houses by individuals,(excluding loans granted by banks to their own employees) and loans given for repairs to the damaged houses of individuals in rural and semi-urban areasTARGETS/SUB-TARGETS
| | Domestic commercial banks | Foreign banks | |||
| Total Priority | 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent | 32 per cent of ANBC or | |||
| Sector | amount of Off-Balance Sheet Exposure, whichever is higher. | credit equivalent amount | |||
| advances | | of Off-Balance Sheet | |||
| | | Exposure, whichever is | |||
| | | higher. | |||
| Total agricultural advances | 18 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. | No target. | |||
| Of this, indirect lending in excess of 4.5% of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, will not be reckoned for computing performance under 18 per cent target. However, all agricultural advances under the categories 'direct' and 'indirect' will be reckoned in computing performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. | |||||
| SSI advances | Advances to SSI sector will be reckoned in computing performance | 10 per cent of ANBC or | |||
| | under the overall priority sector target of 40 per cent of ANBC or credit | credit equivalent amount | |||
| | equivalent amount of Off-Balance Sheet Exposure, whichever is | of Off-Balance Sheet | |||
| | higher. | Exposure, whichever is | |||
| | | higher. | |||
| Micro | (i) 40 per cent of total SSI advances should go to units having | Same | as | for | domestic |
| enterprises within SSI | investment in plant and machinery up to Rs 5 lakh, (ii) 20 per cent of total SSI advances should go to units with | banks. | | | |
| | investment in plant & machinery between Rs 5 lakh and Rs. 25 | | | | |
| | lakh (Thus, 60 per cent of SSI advances should go to the micro | | | | |
| | enterprises). | | | | |
| Export credit | Export credit is not a part of priority sector for domestic commercial | 12 per cent of ANBC or | |||
| | banks. | credit equivalent amount | |||
| | | of Off-Balance Sheet | |||
| | | Exposure, whichever is | |||
| | | higher. | |||
| Advances to | 10 per cent of ANBC or credit equivalent amount of Off-Balance Sheet | No target. | |||
| weaker | Exposure, whichever is higher. | | |||
| sections | | | |||
v IMPACT OF LENDING ON BANK MANAGEMENT
· The improved economic activity in the economy has had a healthy effect
· Loans of the banking sector in this quarter registered an increase of Rs41.4 billion.
· All this increase was contributed by domestic operations as overseas operations, which form around 6 percent of the total loan portfolio
· economic activity in the country, the prevailing easy monetary
· Regime was a major boosting factor in lending growth during the quarter.
· Banks have been moving increasingly into new areas.
· Consumer financing have been the focus of lending by banks for quite some
· Time, and during the quarter under review lending to these sectors improved further.
· Lending to the consumer sector surged by Rs10.2 billion (4.7 percent), while the growth in consumer finance was even more remarkable as this grew by Rs17.4 billion (26.6 percent).
v REVISED GUIDE LINES FOR PRIORITY SECTOR LENDING
Following are the guide lines of priority sector lending· In the revised guideline, RBP has decided to include those sectors as a part of the priority sector, that impact large section of the population,
· It has maintained the overall priority sector lending limit at 40% of adjusted net bank credit for domestic commercial banks and 32% for foreign banks.
· The central bank has increased the home loans under priority sector and loans to individuals for purchase or construction of dwelling unit per family
· Besides, loans given for repairing damaged houses in rural and semi-urban areas the in urban and metropolitan areas would also be included as priority sector advances
· The central bank has also increased the lending for educational loans for studies abroad.
· The RBP has excluded loans to software industry & investments made by banks in recapitalization bonds floated by the government and did not include small road and water transport operations from priority sector lending.
PRACTICAL STUDY
(WITH RESPECT TO THE TOPIC)
SAUDI PAK BANK
v SAUDI PAK BANK
IntroductionSaudi Pak Bank is a subsidiary of Saudi Pak Industrial & Agriculture Investment Company (SAPICO) and a joint venture between the governments of Saudi Arabia Pakistan Pakistan
At present, the bank is providing services to its customers with a network of 50 online branches spanning in 21 cities of the country. In 2008, the majority shareholding of the bank was acquired by a consortium comprising of Bank Muscat S.A.O.G., International Finance Corporation (IFC), Nomura European Investment Limited and Sinthos Capital. A change in management has taken place with Shaukat Tarin as President and CEO of the organization
HistoryAt present, the bank is providing services to its customers with a network of 50 online branches spanning in 21 cities of the country. In 2008, the majority shareholding of the bank was acquired by a consortium comprising of Bank Muscat S.A.O.G., International Finance Corporation (IFC), Nomura European Investment Limited and Sinthos Capital. A change in management has taken place with Shaukat Tarin as President and CEO of the organization
Saudi Pak Commercial Bank Limited (the Bank) was incorporated in Pakistan April 4, 1994 as a public limited company under the Companies Ordinance, 1984; the bank commenced commercial operations on May 07, 1995 . Its shares are quoted on all the Stock Exchanges in Pakistan Pakistan Saudi Pak Tower Islamabad Pakistan Pakistan August 26, 2002 has deferred the applicability of International Accounting Standard 39, Financial Instruments: Recognition and Measurement (IAS-39) and International Accounting Standard 40, Investment Property (IAS-40) for Banking Companies till further instructions. Accordingly, the requirements of these Standards have not been considered in the preparation of these financial statements. However, investments have been classified in accordance with the categories prescribed by the State Bank of Pakistan July 13, 2004 .
To transform the bank into a leading, dynamic and premier institution.
§ To provide customer centric products and services to our target market segments for sustained profitability.
§ To perpetuate value creation for all stake holders; customer, share holders, employees and public
Products§ Online express
§ Munafa Hi Munafa
§ Saudi pak Term Deposit Account
§ Super saver
§ PLS Saving Accounts
§ Special Notice Deposit Accounts
§ Foreign Currency Accounts
§ BBA Accounts
v PRIORITY SECTOR LENDING (SAUDI PAK NBANK)
Saudi Pak Bank gives the priority to following sectors for lending§ Agriculture loan
§ Small Scale Industries
§ Small Business / Service Enterprises
§ Micro Credit
§ Education loans
§ IMPACT OF LENDING ON BANK MANAGEMENT
Saudi Pak Bank has a positive impact on its management in sense of earning that we can under stand by looking the following points§ Increased deposits
§ Easy portfolio management
§ Credit expansion
§ Increased investments
§ Increased earning
§ Booming economy
§ Strong asset management
§ Liability management
· INCREASED EARNING
The over all impact of the priority sector lending is the increase in earning, because the bank lend to those sectors which are the powerful areas that support the economy and increase foreign reserves by the same time these sectors are charged with high interest rates that increased the bank earning
· CREDIT EXPANSION
Loans in percentage terms show a substantial increase of 33 percent; these loans form a tiny portion of the overall lending portfolio. Although these newly emerging sectors improved their share in overall lending portfolio corporate sector, which is the traditional user of bank credit, absorbed the lion’s share of the quarter’s credit expansion. Lending to this sector increased by Rs46.5 billion.
· INCREASED INVESTMENTS
The priority sector lending improves the bank earning which enable it to large investments and raise the cash inflows. The significant about this growth is the rise of Rs20.7 billion under the head of fixed investment. While this investment would boost economic activity on a more sustainable basis, this will, in turn, augment working capital demand in the coming days as well.
· INCREASE DEPOSITS
As for the industry, the deposit base rose significantly in 2006 due to a booming economy,. The banks are now introducing new products for the public to attract fresh deposits. The generally increasing deposits relative to the increasing non-performing loans of the bank may be of concern as it may pose liquidity problems in the future
· BOOMING ECONOMY
Along with improvement in the overall economy, the public sector and its enterprises showed improved performance too. Lending to the public sector declined by around Rs18 billion over the quarter, thereby leaving more funds for private sector investment in promising segments of the economy.
· STRONG ASSET MANAGEMENT
The priority sector portfolio makes the easy management of the assets. Bankers can easily manage their assets to increase cash inflows.
· EASY LIABILITY MANAGEMENT
This creates a balance between assets and liabilities and due to increased cash flows/earning bank can easily pay off its short term and long term liabilities
· INCREASED LENDING
Looking at the sector wise composition of loans portfolio, the lending of the sector increased by Rs33.2 billion. While foreign banks actively participated in credit expansion during the quarter registering a growth of Rs8.9 billion or 7.0 percent, · EASY PORTFOLIO MANAGEMENT
The liquidity profile of the bank shows a comforting trend. The liquidity situation of the bank has improved in general over the period under review, with increasing earning assets to total assets moderate advances growth rate.
v ADVANTAGES OF PRIORITY SECTOR LENDING
These are the following advantages
§ Priority sector lending support the economy of the country.
§ It improves the particular area and promotes employment.
§ It assists the government in reducing unemployment.
§ Lending to priority sectors is the major source of earning for bank.
§ Helps to improve the living standards of the nation.
§ Provides the financial assistance to weaker industries.
§ Promotes /support small and medium enterprises.
§ It promote education by providing financial add to institutes
§ It improves and promotes agriculture sector which is the back bone of the economy.
§ It creates a balance between assets and liabilities.
§ The overall impact on bank management is very pleasant.
v DISADVANTAGE
There is no significant disadvantage of the priority sector lending for the bank and country as well however there may be some more sectors (which required financial support) which are being neglected by the bank.
v RECOMMENDATION
Following are the recommendations for the priority sector lending
§ It is strongly recommended that the bank should increase the area ofr lending as it is the effective way to to support the economy and to reduce the unemployment, to promote industry.
§ The amount for lending should be increase so that the maximum community can be supported To support the single individual in setting their small business
v CONCLUSION
It is concluded that priority sector lending has a great impact on bank management as well bank earning, this is the powerful tool to support the economy of the country and the nation as well.
REFERENCES & ANNEX
1. TEXT BOOK
Credit Management (Fifth edition) by (Peter S Rose)
2. PRACTICAL STUDY
Saudi Pak Commercial Bank
