Historically, Asian governments have used state-directed priority sector lending as a policy tool to improve access to credit for underserved sectors. Today, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam implement some form of priority sector lending, whether through lending quotas or interest rate caps. Among priority sectors, small- and medium-sized enterprises (SMEs) and agriculture frequently receive preference across the geographies considered in this sample, creating an opportunity to assess common implications of current priority sector lending programs.
This Asia Focus discusses Asia’s experience with priority sector lending, reviews the current state-level priority sector lending policies in several Asian economies, assesses the implications for the respective domestic banking systems, and examines potential alternative mechanisms to encourage lending to priority sectors.