Priority Sector Lending (PSL) is a crucial aspect of banking and financial policy aimed at fostering inclusive growth and equitable distribution of credit in a country’s economy. Generally mandated by central banks or regulatory authorities, PSL requires financial institutions to allocate a certain percentage of their lending portfolio to specific sectors deemed vital for the socio-economic development of the nation. These sectors typically include agriculture, micro, small, and medium enterprises (MSMEs), education, housing, export credit, and other marginalized segments of society. PSL not only ensures that credit reaches underserved and vulnerable sections of the population but also plays a pivotal role in promoting entrepreneurship, rural development, employment generation, and overall economic stability. Thus, it serves as a cornerstone in the pursuit of balanced and sustainable economic growth, addressing disparities and fostering resilience within the financial system.
Priority Sector Credit
- Background:
· After the nationalization of many public sector banks in 1969, the Indian government focused on inclusive banking.
· Directed credit, a form of mandated credit allocation, was introduced to target sectors that were effectively excluded from formal banking.
- Objective:
· The primary objective of directed credit is to allocate funds to sectors with welfare significance, high potential for employment and growth, exports, and improvement of livelihoods.
- Priority Sector:
· Priority sector refers to a category that receives special attention and credit allocation from banks to meet national development goals.
· The Reserve Bank of India (RBI) directs banks to allocate a certain percentage of their lending to priority sectors.
- Categories Under Priority Sector:
1. Agriculture: Includes credit to farmers for agricultural activities.
2. Micro, Small, and Medium Enterprises (MSMEs): Targets lending to small businesses.
3. Export Credit: Aims to support credit needs for export activities.
4. Education: Focuses on providing financial support for educational purposes.
5. Housing: Includes financing for housing-related activities.
6. Social Infrastructure: Involves credit allocation for social infrastructure projects.
7. Renewable Energy: Aims to support the development of renewable energy projects.
Priority Sector Lending Targets:
1. Domestic Scheduled Commercial Banks and Foreign Banks with 20 branches and above:
- Total Priority Sector: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
- Agriculture: 18% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, with a target of 8% specifically for Small and Marginal Farmers.
- Micro Enterprises: 7.5% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure.
- Advances to Weaker Sections: 12% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure.
2. Foreign Banks with less than 20 branches:
- Total Priority Sector: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
- Out of the total, up to 32% can be in the form of lending to exports, and not less than 8% should be allocated to any other priority sector.
3. Regional Rural Banks:
- Total Priority Sector: 75% of Adjusted Net Bank Credit (ANBC).
- However, lending to Medium Enterprises, Social Infrastructure, and Renewable Energy is considered for priority sector achievement only up to 15% of ANBC.
- Agriculture: 18% of ANBC.
- Micro Enterprises: 7.5% of ANBC.
- Advances to Weaker Sections: 15% of ANBC.
4. Small Finance Banks:
- Total Priority Sector: 75% of Adjusted Net Bank Credit (ANBC).
- Agriculture: 18% of ANBC.
- Micro Enterprises: 7.5% of ANBC.
- Advances to Weaker Sections: 12% of ANBC.
Priority Sector Lending (PSL) targets are designed to ensure that banks contribute to the development of specific sectors crucial for the overall economic growth and social well-being of the country.
- Preferential Rate of Interest:
· Priority sector guidelines do not mandate a preferential rate of interest for loans within the priority sector.
- Redistributive Effect:
· Priority sector lending is considered redistributive in effect, as it aims to channel credit to sectors that may face challenges in accessing funds through conventional banking channels.
Priority sector credit plays a crucial role in fostering inclusive growth, supporting vital sectors, and addressing the credit needs of marginalized sections of society.
New Guidelines for Priority Sector Lending (PSL) as of 2020:
The Reserve Bank of India (RBI) introduced revised Priority Sector Lending guidelines in 2020, incorporating several key changes:
- Fresh Categories Eligible for PSL Finance:
- Bank finance for start-ups up to Rs. 50 crore.
- Loans to farmers for solar power plants.
- Loans for setting up Compressed BioGas plants.
- Higher Credit Limit for Farmers Producers Organisations (FPOs):
- FPOs with assured marketing of produce have a higher credit limit.
- Loan Limits and Aggregate Limit:
- Loans are subject to an aggregate limit of Rs. 2 crores per borrowing entity.
- Loan limits include up to Rs. 30 crores for renewable energy projects, Rs. 10 lakhs per borrower for individual households, and up to Rs. 10 crores for healthcare facilities in Tier II to Tier VI centres.
- Phased Increase in Targets:
- Phased increase in targets for lending to small and marginal farmers and weaker sections.
- Credit Limits Doubled:
- Credit limits doubled for renewable energy and health infrastructure projects, including the ‘Ayushman Bharat’ initiative.
- Addressing Regional Disparities:
- District-wise ranking based on per capita credit flow to the priority sector.
- Incentive framework for districts with low credit flow.
- Disincentive framework for districts with high credit flow.
- Higher weightage assigned to priority sector credit in identified districts with low flow.
These guidelines aim to align priority sector lending with emerging national priorities and promote inclusive growth across sectors and regions.
Categories under Agriculture:
The activities classified under Agriculture are divided into three sub-categories:
- Farm Credit:
- Loans to individual farmers, including Self Help Groups (SHs) or Joint Liability Groups (JLGs) directly engaged in Agriculture and Allied Activities (dairy, fishery, animal husbandry, poultry, bee-keeping, and sericulture).
- Crop loans and loans for pre and post-harvest activities.
- Loans to farmers under the Kisan Credit Card Scheme.
- Loans to small and marginal farmers for purchasing land for agricultural purposes.
- Loans to corporate farmers and farmers’ producer organizations engaged in Agriculture and Allied Activities.
- Agriculture Infrastructure:
- Loans for the construction of storage facilities (warehouse, market yards, godowns, and silos), including cold storage.
- Loans for soil conservation and watershed development.
- Financing for plant tissue culture, agri-biotechnology, seed production, bio-pesticides, bio-fertilizer, and vermi composting.
- Ancillary Activities:
- Loans for setting up Agriclinics and Agribusiness Centres.
- Funding for food and agro-processing, etc.
Social Infrastructure: Social infrastructure includes loans for the development of schools, healthcare facilities, drinking water facilities, and sanitation facilities (including construction/refurbishment of toilets and improvement in water facilities in households). Bank credit to Micro Finance Institutions (MFI) for on-lending to individuals/members of SHGs/JLGs for water and sanitation facilities is also eligible for classification as priority sector loans under ‘Social Infrastructure,’ subject to specific criteria.
Weaker Sections: Priority sector loans eligible for consideration under the Weaker Sections category include:
- Small and Marginal Farmers.
- Artisans, village, and cottage industries.
- Beneficiaries under Government Sponsored Schemes like the National Rural Livelihoods Mission (NRLM), etc.
- Scheduled Castes and Scheduled Tribes.
- Beneficiaries of the Differential Rate of Interest (DRI) scheme.
- Self Help Groups.
- Distressed farmers indebted to non-institutional lenders.
- Distressed persons other than farmers repaying non-institutional lenders.
- Individual women beneficiaries.
- Persons with disabilities.
- Minority communities as notified by the Government of India from time to time.
Priority Sector Lending Certificates (PSLCs):
Priority Sector Lending Certificates (PSLCs) serve as a mechanism to balance the priority sector lending targets among banks. The concept of PSLCs allows banks to manage their compliance with the priority sector lending targets and sub-targets.
Here’s how PSLCs work:
- Surplus and Shortfall:
- Some banks may surpass the prescribed priority sector lending targets, creating a surplus.
- Others may fall short of the targets, resulting in a shortfall.
- Balancing Mechanism:
- Banks with a surplus can issue PSLCs representing their excess achievement in meeting priority sector lending targets.
- Banks facing a shortfall can purchase these PSLCs from surplus banks to offset their deficit.
- Incentives:
- Surplus banks are incentivized to sell PSLCs, as it allows them to monetize their excess achievements.
- Deficit banks benefit by meeting their priority sector lending targets through the acquisition of PSLCs.
- Enhancing Priority Sector Lending:
- The PSLC system encourages surplus banks to continue lending to priority sectors, as they can profit from selling PSLCs.
- It provides flexibility to banks with shortfalls, enabling them to comply with regulatory requirements by purchasing PSLCs from surplus banks.
In summary, PSLCs act as tradable instruments that facilitate the efficient allocation of priority sector lending targets across banks, ensuring that overall sectoral goals are met. This mechanism encourages a balanced approach to priority sector lending in the banking sector.
FAQs
1. What is Priority Sector Lending (PSL)?
- Priority Sector Lending (PSL) is a regulatory requirement by the Reserve Bank of India (RBI) that mandates banks to allocate a certain percentage of their lending to specific sectors deemed essential for the socio-economic development of the country.
2. Which sectors fall under Priority Sector Lending?
- Sectors such as agriculture, micro, small, and medium enterprises (MSMEs), education, housing, export credit, renewable energy, and social infrastructure are classified under Priority Sector Lending. These sectors are crucial for fostering inclusive growth and reducing regional disparities.
3. What are the objectives of Priority Sector Lending?
- The primary objectives of Priority Sector Lending are to ensure equitable distribution of credit, enhance financial inclusion by reaching out to underserved segments of the population, promote employment generation, and stimulate economic development in backward regions.
4. What are the benefits of Priority Sector Lending for banks?
- Banks complying with Priority Sector Lending norms enjoy benefits such as concessional refinance facilities from the RBI, lower cash reserve ratio (CRR) requirements, and priority sector status in terms of meeting regulatory obligations. Additionally, serving priority sectors can diversify a bank’s loan portfolio and mitigate risks.
5. How does Priority Sector Lending impact borrowers?
- Priority Sector Lending facilitates access to credit for marginalized sections of society, rural populations, and small businesses who often struggle to obtain financing. By ensuring affordable credit availability, PSL contributes to the empowerment of these segments, fostering their economic participation and improving their standard of living.
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