Implications of Priority Sector Lending on Capital Adequacy Ratio: An Evaluative Study on Non- Performing Assets

Abstract

The survival and growth of banking industry is depends upon the credit creation ability and debt recovering capacity. In Indian context the banking institutions are struggling from growing outstanding debts termed as Non-Performing Assets (NPA). To avoid this and generate attractive revenue earlier banks were offering loans to creditworthy individual and large established business by ignoring those sectors whose development is much needed to develop the country and social welfare. The norms of priority sector lending introduced by the government mandate the banks to provide loans to priority sector. The particular research aims to evaluate the impact of total NPA in general and NPA of priority sectors in particular on the capital adequacy by examining the share of priority sectors NPA in total NPA. The study concluded that Indian banks are fundamentally strong with significantly higher capital adequacy ratio while comparing to Basel III standards. So that the banks can extend liberalized advances to priority sectors.