The regulation directing banks to lend 40% of their advances to the priority sectors is the first exercise that the Government of India undertook by way of a corrective measure for the lop-sided credit policies of the Banks in India in those days i.e. prior to nationalisation of banks in 1969. This discipline was enforced when banks were brought under social control in 1967 i.e. even before nationalisation. This is a comprehensive measure, since it automatically cast an obligation on the banks for lending 18% of their net outstanding credit to Agriculture as part of the priority sector targets. This in turn focussed and depended on opening a number of rural and semi-urban branches. Banks cannot lend to agriculture significantly enough to fulfill the target unless they move to the rural areas extensively.

Priority sectors represent the prime engine of the national economy providing a momentum of thrust to its quick development and ushering progress to society, employment generation and poverty alleviation. These are intensively employment oriented programmes with the inherent potential of securing a quicker return on investment in the short term, i.e. with minimum gestation period. For example short-term and medium-term investments in agriculture, working capital and investment loans for small scale industry or loans for self-employed professionals or technocrats are all productive ventures giving quick results. Government has accepted the planned development of the economy and commercial banks as the primary credit providers and the vehicle of promoting economic development in the country have to conform their functions in co-ordination with the plan priorities and national objectives. Large scale unemployment and poverty amongst the Indian masses were the road-blocks which the Government was determined to remove and banks have to regulate their functions and accept their role as development institutions and not acting exclusively as commercial institutions motivated towards securing maximum profits.

The obligation to provide a wide spread and coverage of these type of advances necessitates the Banks to change the basic culture of their lending exercise, hitherto confined primarily to big businessmen and traders locating their operations predominately in the metropolitan and urban centres. Banks were necessarily to move to the rural and semi-urban centers and to hitherto unbanked/underbanked areas in order to fulfill their new responsibility.

Broadly, the priority sector comprises the following:

1. Agriculture (direct & indirect finance)

2. Direct & Indirect Finance to Small scale industries (including setting up of industrial estates)

3. Small road and water transport operators (owning upto 10 vehicles).

4. Small business (Original cost of equipment used for business not to exceed Rs 20 lakh)

5. Retail trade (advances to private retail traders upto Rs.10 lakh)

6. Professional and self-employed persons (borrowing limit not exceeding Rs.10 lakh of which not more than Rs.2 lakh for working capital; in the case of qualified medical practitioners setting up practice in rural areas, the limits are Rs 15 lakh and Rs 3 lakh respectively and purchase of one motor vehicle within these limits can be included under priority sector)

7. State sponsored organisations for Scheduled Castes/Scheduled Tribes

8. Education (educational loans granted to individuals by banks)

9. Housing [both direct and indirect - loans upto Rs.5 lakhs (direct loans upto Rs 10 lakh in urban/ metropolitan areas), Loans upto Rs 1 lakh and Rs 2 lakh for repairing of houses in rural/ semi-urban and urban areas respectively].

10. Consumption loans (under the consumption credit scheme for weaker sections)

11. Micro-credit provided by banks either directly or through any intermediary; Loans to self help groups(SHGs) / Non Governmental Organisations (NGOs) for onlending to SHGs

12. Loans to the software industry (having credit limit not exceeding Rs 1 crore from the banking system)

13. Loans to specified industries in the food and agro-processing sector having investment in plant and machinery up to Rs 5 crore.

14. Investment by banks in venture capital (venture capital funds/ companies registered with SEBI)

Direct Agricultural advances denote advances given by banks directly to farmers for agricultural purposes. These include short-term loans for raising crops i.e. for crop loans. In addition, advances upto Rs. 5 lakh to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, where the farmers were given crop loans for raising the produce, provided the borrowers draw credit from one bank.

Direct finance also includes medium and long-term loans (Provided directly to farmers for financing production and development needs) such as Purchase of agricultural implements and machinery, Development of irrigation potential, Reclamation and Land Development Schemes, Construction of farm buildings and structures, etc. Other types of direct finance to farmers includes loans to plantations, development of allied activities such as fishery, poultry etc and also establishment of bio-gas plants, purchase of land for agricultural purposes by small and marginal farmers and loans to agri-clinics and agri-business centres.

Indirect finance denotes to finance provided by banks to farmers indirectly, i.e., through other agencies. Important items included under indirect finance to agriculture are as under:

1. Credit for financing the distribution of fertilisers, pesticides, seeds, etc.

2. Loans upto Rs. 25 lakhs granted for financing distribution of inputs for the allied activities such as, cattle feed, poultry feed, etc.

3. Loans to Electricity Boards for reimbursing the expenditure already incurred by them for providing low tension connection from step-down point to individual farmers for energising their wells.

4. Loans to State Electricity Boards for Systems Improvement Scheme under Special Project Agriculture (SI-SPA).

5. Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained with NABARD.

6. Subscription to bonds issued by Rural Electrification Corporation (REC) exclusively for financing pump-set energisation programme in rural and semi-urban areas and also for financing System Improvement Programme (SI-SPA).

7. Subscriptions to bonds issued by NABARD with the objective of financing agriculture/allied activities.

8. Finance extended to dealers in drip irrigation/sprinkler irrigation system/agricultural machinery, subject to the following conditions:

   1. The dealer should be located in the rural/semi-urban areas.

   2. He should be dealing exclusively in such items or if dealing in other products, should be maintaining separate and distinct records in respect of such items.

   3. A ceiling of upto Rs. 20 lakhs per dealer should be observed.

9. Loans to Arthias (commission agents in rural/semi-urban areas) for meeting their working capital requirements on account of credit extended to farmers for supply of inputs.

10. Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture

Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.

The investment limit of Rs.1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery and hand tools by the Government of India

The status of 'Tiny Enterprises' is given to all small scale units whose investment in plant & machinery is upto Rs. 25 lakhs, irrespective of the location of the unit.