Indian bank profits hit by priority sector lending : World Bank

New Delhi: The World Bank in its report, 'Sustaining India's Service Revolution' has said that government ownership of banks in India stifles competition and raises the cost of lending to the public. In addition, the World Bank has blamed RBI's stiff priority sector lending norms for foreign and domestic banks for the weak financial health of commercial banks.

The report has indicted predominant government ownership in the banking sector that led to insufficient competition in the Indian banking system and said it led to increased cost of intermediation, lowering capital allocation efficiency and under-lending to the private sector.

The Bank said that though the focus on priority lending helped in tackling poverty in rural areas it had its toll on the finances of the commercial banks. Domestic banks in India are required to allocate 40 per cent of their total credit to priority sector; the corresponding requirement for the foreign banks is 32 per cent

The World Bank said that even though successive Indian governments had tried through bank nationalisation, (14 banks were nationalised in 1969) priority sector lending and rural branch expansion, to provide universal access to banking services in India, the measures had not yielded healthy results for the banks. The focus on rural expansion had led to PSU banks having 70 per cent of their branches in rural areas leading to huge losses for the concerned commercial banks.

Even though the share of public sector banks in total assets dipped by 10 per cent during 1991-2001, the present market share of PSU banks stands at 80 per cent. The World Bank said that the liberalised banking sector had grown faster at 11.8 per cent than non-liberalised sector during the '90s.