Title: Contagion effect of priority sector lending of banks on non-performing assets: a special reference to loan disbursement to self-help groups

Authors: M.K. Muhammed Shafi; Shaik Saleem; Praveen Kakada

Addresses: Department of Management Studies, National Institute of Technology Warangal, NIT Warangal, 506004, India ' VIT Business School, Vellore Institute of Technology, Chennai, Tamil Nadu, 600127, India ' VIT Business School, Vellore Institute of Technology, Chennai, Tamil Nadu, 600127, India

Abstract: For the last few years, bad loans and NPAs have been a significant cause of concern within India's banking sector, with priority lending sectors generally regarded as one of the main factors behind them. This study aimed to analyse the impact of the priority sector lending (PSL) norm of the Reserve Bank of India (RBI) on the banking sector, especially on non-performing assets (NPAs). Since the self-help groups (SHGs) are one of the major lending categories under this norm, the study analysed the overall progress of SHGs and sector-wise banking contribution to the eight PSL categories of the primary economic sectors. For the study, aggregated data on credit deployment to priority sector and NPAs was collected from the RBI database for public, private, and foreign banks. Statistical tools like correlation, structural equation modelling, and ordinary least squares have been incorporated to meet the study's objectives. The results indicate a negative relationship between the gross NPA of banks and loan disbursement to the SHGs over the years, and all the bank groups continue to attain the 40% prescribed target of PSL, especially private sector banks.

Keywords: priority sector lending; PSL; self-help groups; SHGs; credit deployment; micro credit; non-performing asset; NPA; bank linkage programs; micro finance institutions; financial performance of banks; structural equation modelling; SEM.

DOI: 10.1504/IJEF.2026.150289

International Journal of Electronic Finance, 2026 Vol.15 No.1, pp.61 - 78

Received: 28 Apr 2023
Accepted: 20 Sep 2023
Published online: 08 Dec 2025 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article