Unravelling the drivers of priority sector lending for inclusive economic growth: Evidence from India

Abstract

This research aims to explore the factors influencing Priority Sector Lending (PSL) in India, with a specific focus on both bank-specific and macroeconomic variables. By delving into the determinants shaping the implementation of PSL, the study seeks to understand why PSL levels have fallen below mandated targets in recent years. The study examines PSL data from 18 institutions spanning the years 2007 to 2020. The study looks at connection between factors specific to banks, macroeconomic variables, and the distribution of credit to support priority sectors using a random effects model that takes into account the different types of variables. The analysis reveals a noteworthy positive correlation between deposits and PSL. However, the study finds insignificance in the relationship between bank-specific variables and PSL. These findings shed light on the complexities surrounding meeting PSL targets, underscoring the necessity for comprehensive policy interventions, capacity-building initiatives, and improved stakeholder coordination to bolster the effectiveness of PSL. Understanding the challenges and opportunities associated with achieving PSL targets is crucial. The research underscores the need for proactive policy measures, efforts to enhance institutional capacities, and better coordination among stakeholders. Implementing these measures could significantly augment the efficacy of PSL and foster inclusive growth by ensuring financial access to underserved segments of society in India.