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Priority Sector Lending
Priority Sector Lending (PSL) refers to a regulatory framework implemented by central banks or financial authorities in many countries to ensure that a certain portion of bank loans are directed towards specific sectors of the economy that are considered to be important for overall development and inclusive growth.
Read about: MCLR Marginal Cost of Funds Based Lending Rate
Priority Sector Lending History
Priority sector lending originated in 1966 when Morarji Desai recognized the need to increase credit to agriculture and small industries. The formal definition of the priority sector was established in 1972 based on a report by the Reserve Bank of India (RBI) in the National Credit Council. In 1974, commercial banks were assigned a target of 33.33% of their Adjusted Net Bank Credit (ANBC), which was later increased to 40% of ANBC as per the recommendations of the Dr. K.S. Krishnaswamy committee.
Following the nationalization of banks, the priority sector framework also served as a means for Indira Gandhi, the Prime Minister at the time, to address the demands of influential political groups. Over time, the definition of the priority sector expanded beyond these lobbying groups to encompass other neglected sectors of the economy.
However, despite subsequent adjustments, the classification still places significant emphasis on agriculture and small industries, which include micro, small, and medium enterprises (MSMEs).
Read about: Indian Financial System
Priority Sector Lending Categories
Priority sector lending by banks in India covers a range of sectors that receive focused credit allocation. These sectors include agriculture, micro, small, and medium enterprises (MSMEs), export credit, education, housing, social infrastructure, renewable energy, and other sectors deemed part of the priority sector.
As per the regulatory guidelines set by the Reserve Bank of India (RBI), banks are required to allocate a specific percentage of their total lending to these priority sectors. This framework ensures that these sectors receive adequate financial support, fostering inclusive growth and addressing crucial areas of the economy such as rural development, employment generation, and sustainable energy.
Read about: Difference Between Organised and Unorganised Sector
Priority Sector Lending Targets
Here are the details regarding the Priority Sector Lending (PSL) targets for different categories of banks in India:
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.
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.
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.
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.
Read about: National Payments Corporation of India
Priority Sector Lending New Guidelines
New guidelines for Priority Sector Lending (PSL) were introduced by RBI in 2020. Here are the key points related to revised PSL guidelines.
- Fresh categories eligible for PSL finance: Bank finance for start-ups up to Rs. 50 crore, loans to farmers for solar power plants, and loans for setting up Compressed BioGas plants.
- The higher credit limit for Farmers Producers Organisations (FPOs) with assured marketing of produce.
- Loans are subject to an aggregate limit of Rs. 2 crores per borrowing entity.
- Phased increase in targets for lending to small and marginal farmers and weaker sections.
- Credit limits doubled for renewable energy and health infrastructure projects, including ‘Ayushman Bharat’.
- Loan limits: 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.
- Addressing regional disparities: District-wise ranking based on per capita credit flow to priority sector.
- Incentive framework for districts with low credit flow and disincentive framework for districts with high credit flow.
- Higher weightage is assigned to priority sector credit in identified districts with low flow.
Also Read: Informal Economy in India
Priority Sector Lending UPSC
Priority Sector Lending (PSL) is a significant topic covered in the UPSC Syllabus, particularly in the Economics and Finance sections. Aspirants preparing for UPSC can find relevant study material and resources, including UPSC Online Coaching and UPSC Mock Test, to enhance their understanding of PSL.
It is essential to grasp the PSL targets and categories set by the Reserve Bank of India (RBI) for different types of banks, such as domestic scheduled commercial banks, foreign banks, regional rural banks, and small finance banks. Understanding the PSL framework, including the specific percentages allocated to sectors like agriculture, micro-enterprises, and advances to weaker sections, is crucial for aspirants aiming to excel in the UPSC examination.
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