Priority Sector Advances & Profitability - A Case of Indian Banking Industry

Scheduled Commercial Banks (SCBs) were advised to grant at least 40% of their loans (measured in terms of Adjusted Net Bank Credit or ANBC) to borrowers in the priority sectors in order to provide institutional credit to those sectors and segments for whom it is difficult to get credit. Thus, Priority Sector Advances constitutes very large proportion of the Total Advances in Banks Balance Sheet. The present study is an attempt to analyze the Impact of Priority Sector Advances on Banks Profitability. All the scheduled commercial banks operating in India were considered for the analysis. Ratios of Priority Sector Advances to Total Advances (PSATA) of all commercial banks taken as an independent variables whereas, Return on Assets (ROA), Return on Investment (ROI), Return on Equity (ROE), Ratio of Operating Profit to Total Assets, (OPTA), and Ratio of Interest Income to Total Assets (INTTA) were taken as dependent variables. The study covers the period ranging from financial year 2004-05 to 2015-16 and entire dataset was taken from Reserve Bank of India website. The study reveals that there exists a statistically significant relationship between PSATA & INTTA and PSATA & ROE. However statistically significant relationship could not be found between PSATA and ROI, ROA & OPTA