Title: Priority sector lending by the Indian public banks: impact on capital formation and NPAs

Authors: Dhananjay Ashri; Muskan Kaur; Bibhu Prasad Sahoo

Addresses: Indian Institute of Management, Kozhikode, Kerela, India ' SGTB Khalsa College, University of Delhi, Delhi, India ' SGTB Khalsa College, University of Delhi, Delhi, India

Abstract: This paper investigates the effect of priority sector lending (PSL) by Indian public sector banks (PSBs) on capital formation and bad loans in India. Nonlinear auto regressive distributive lag (NARDL) model has been proposed to assess PSL contribution to capital formation. Furthermore, a panel data regression model has been employed to investigate the relationship between growing non-performing assets (NPAs) and PSL. The empirical results revealed that PSL contributes towards the growth of capital formation. While a large part of the literature advocates that lending to priority sectors leads to mounting NPAs in the public sector banks (PSBs), the empirical evidence of the study finds an insignificant impact of PSL on NPAs. India is a developing nation, and directed credit program shall be encouraged. The flow of credit to targeted sectors enhances productivity and leads to better utilisation of resources by these sectors, which augments capital growth.

Keywords: priority sector lending; PSL; public banks; NPAs; capital formation.

DOI: 10.1504/GBER.2025.146499

Global Business and Economics Review, 2025 Vol.32 No.4, pp.441 - 463

Received: 12 Feb 2023
Accepted: 08 Oct 2023
Published online: 02 Jun 2025 *

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