Does Ownership Pattern Determine Banks’ Priority Sector Lending Practices? Insights from Review of Literature

Abstract

This article reviews the previous research and studies how bank ownership affects loans made under the Priority Sector Lending (PSL) program. This scheme requires banks to lend a particular amount of their lending to sectors that aren't getting enough funding, like agriculture, small businesses, and education. The findings indicate that public, private, and international banks contribute differently to the PSL targets. Public sector banks (PSBs) are more likely to follow PSL rules since they are in line with government policies and social welfare aims. However, they do have problems, such as inefficiency and higher credit risks in priority industries. On the other hand, private sector banks are pickier about who they lend to because they want to make money. They focus on less hazardous areas but nevertheless help PSL by strategically prioritizing. Foreign banks typically engage in PSL less frequently due to their global focus. Instead, they frequently purchase PSL certificates to indirectly participate. The assessment also talks about how digital banking and fintech developments might help banks attain their PSL goals. Digital tools have helped banks, especially PSBs, better serve priority sectors by making it easier for people in remote places to obtain financial services and by improving risk management. Overall, the studies reveal that while public sector banks dominate in PSL compliance, the roles of private and foreign banks—though more selective—are still vital for achieving the scheme’s objectives, and fintech has the potential to enhance both the efficiency and effectiveness of PSL lending.