Priority Sector Lending (PSL)
Lending by a commercial bank for certain sectors which are identified as “priority sector” by the central bank (Reserve Bank of India) is called as priority sector lending.
Priority sector lending (PSL) should constitute 40 percent of Adjusted Net Bank Credit ANBC] or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. To the extent of shortfall in the achievement of target, banks may be required to invest in Rural Infrastructure Development Fund (RIDF) established with National Bank for Agriculture and Rural Development (NABARD) and other Funds with NABARD or National Housing Bank (NHB) or Small Industries Development Bank of India (SIDBI) or Micro Units Development Refinance Agency Bank (MUDRA Ltd)., as decided by the Reserve Bank from time to time, or purchase priority sector lending certificates (PSLC).
Categories or sectors of economy falling under the “priority sector”, the types of loans to these sectors that are eligible to be categorized as priority sector loans and the target amount to be lent to each one of these sectors are given below:
|Priority Sector||A brief description of the types of loans eligible as priority sector loans||Target / Sub-target under PSL, if any (as % of the ANBC or Credit equivalent amount of off-balance sheet exposure whichever is higher)|
|Agriculture||It essentially consists of Farm Credit which will include short-term crop loans and medium/long-term credit to farmers, agriculture Infrastructure and ancillary activities etc.,
loans to distressed farmers, loans under Kisan Credit Card Scheme,Loans to corporate farmers, farmers' producer organizations/companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in agriculture and allied activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up to an aggregate limit of ₹ 2 crore per borrower etc.
|18% with 8% as loans to small and marginal farmers|
|Micro, Small and Medium Enterprises||This includes loans to Khadi and Village industries, outstanding deposits with Small Industries Development Bank of India (SIDBI) and Micro Units Development Refinance Agency Bank (MUDRA Ltd.) on account of priority sector shortfall etc.||7.5%|
|Export Credit||loans for export subject to a sanctioned limit of up to ₹ 25 crore per borrower to units having turnover of up to ₹ 100 crore||upto 2%;|
|Education||Loans to individuals upto Rs. 10 lakh|
|Housing||Loans to individuals up to ₹ 28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to ₹ 20 lakh in other centres for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed ₹ 35 lakh and ₹ 25 lakh respectively, loans for repairs to house, bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of ₹ 10 lakh per dwelling unit. etc.|
|Social Infrastructure||Bank credit to Micro Finance Institutions (MFIs) extended for on-lending to individuals and also to members of Self Help Group (SHGs)/joint Liability Groups (JLGs) for water and sanitation facilities etc.|
|Renewable Energy||loans up to a limit of ₹ 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. For individual households, the loan limit will be ₹ 10 lakh per borrower.|
|Advances to weaker sections||Loans to minorities, women, scheduled caste and scheduled tribes, small and marginal farmers, self help groups, cottage industries etc. Overdrafts upto ₹ 5,000/- under Pradhan Mantri Jan-Dhan Yojana (PMJDY) accounts, provided the borrower’s household annual income does not exceed ₹ 100,000/- for rural areas and ₹ 1,60,000/- for non-rural areas,||10%|
|Others||Loans not exceeding ₹ 50,000/- per borrower provided directly by banks to individuals and their SHG/JLG, provided the individual borrower’s household annual income in rural areas does not exceed ₹ 100,000/- and for non-rural areas it does not exceed ₹ 1,60,000/-, Loans to distressed persons [other than farmers] not exceeding ₹ 100,000/- per borrower to prepay their debt to non-institutional lenders etc.|
The exact updated details of various types of loans eligible for PSL under each of these sectors may be seen from the RBI Master Circulars on the subject. A particular loan may fall under different sectors of the priority sector but is only counted once. For instance, loans to small and marginal farmers may come under ‘Agriculture’ or under ‘advances to weaker sections’
A bank’s PSL achievement would be computed as the sum of outstanding priority sector loans, deposits held with NABARD/NHB/MUDRA/SIDBI and the net nominal value of the Priority Sector Lending Certificates (PSLCs) issued and purchased.
The compliance of banks to PSL targets are monitored on ‘quarterly’ basis. For the year 2015-16, the shortfall in achieving priority sector target/sub-targets will be assessed based on the position as on March 31, 2016. From financial year 2016-17 onwards, the achievement will be arrived at the end of financial year based on the average of priority sector target /sub-target achievement as at the end of each quarter.
Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes.
Some relaxations exist for foreign banks in terms of the time period for achieving PSL targets and sub-targets. For instance, Foreign banks with 20 branches and above have to achieve the Total Priority Sector Lending target within a maximum period of five years starting from April 1, 2013 and those with less than 20 branches have to attain the same within 7 years.
Background & History
At a meeting of the National Credit Council held in July 1968, it was emphasized that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries. The description of the priority sectors was later formalized in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a modified return for reporting priority sector advances and certain guidelines were issued in this connection indicating the scope of the items to be included under the various categories of priority sector. Although initially there was no specific target fixed in respect of priority sector lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33.3% by March 1979.
At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sector to 40 percent by March 1985. Subsequently, on the basis of the recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial banks were advised to achieve the target of priority sector lending at 40 percent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups.
The guidelines were revised in the year 2007 based on the recommendations made in September 2005 by the Internal Working Group of the RBI (Chairman: Shri C. S. Murthy). The Sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y. H. Malegam) constituted to study issues and concerns in the Micro Finance institutions (MFI) sector, inter alia, had recommended review of the guidelines on priority sector lending.
Accordingly, Reserve Bank of India in August 2011 set up a Committee to re-examine the existing classification and suggest revised guidelines with regard to Priority Sector lending classification and related issues (Chairman: M V Nair). Revised guidelines were issued on July 20, 2012.
An Internal Working Group (IWG) was set up by RBI in July 2014 to revisit the hitherto existing priority sector lending guidelines. Based on the committee recommendations the same was modified with the following changes:
- Medium Enterprises, Social Infrastructure and Renewable Energy will form part of priority sector, in addition to the existing categories.\
- The distinction between direct and indirect agriculture is dispensed with.
- A target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, has been prescribed for Small and Marginal Farmers within agriculture, to be achieved in a phased manner i.e., 7 percent by March 2016 and 8 percent by March 2017.
- A target of 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, has been prescribed for Micro Enterprises, to be achieved in a phased manner i.e. 7 percent by March 2016 and 7.5 percent by March 2017.
- There is no change in the target of 10 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, for Weaker Sections.
- Foreign Banks with 20 branches and above already have priority sector targets and sub-targets for Agriculture and Weaker Sections, which are to be achieved by March 31, 2018 as per the action plans submitted by them and approved by RBI. The sub-targets for Small and Marginal Farmers and Micro Enterprises would be made applicable post 2018 after a review in 2017. Foreign banks with less than 20 branches will move to Total Priority Sector Target of 40 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, on par with other banks by 2019-20, and the sub-targets for these banks, if to be made applicable post 2020, would be decided in due course.
- Bank loans to food and agro processing units will form part of Agriculture.
- Export credit upto 32 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, will be eligible as part of priority sector for foreign banks with less than 20 branches. For other banks, the incremental export credit over corresponding date of the preceding year will be reckoned upto 2 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
- The loan limits for housing loans and micro finance institutions (MFI) loans qualifying under priority sector have been revised.
- The priority sector non-achievement will be assessed on quarterly average basis at the end of the respective year from 2016-17 onwards, instead of annual basis as at present.
- Priority Sector Lending: Targets and Classifications – RBI Master Circular as amended upto December 2015 and previous master circulars on the subject.