Priority Sector Lending Certificates (PSLC)
Priority Sector Lending Certificates (PSLCs) are tradable certificates issued against priority sector loans of banks so as to enable banks to achieve their specified target and sub-targets for priority sector lending through purchase of these instruments in the event of a shortfall and at the same time incentivizing the surplus banks to lend more to these sectors.
It is mandated in India that 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. Sub-targets are specified for certain sectors like 18% to agriculture with 8% to small and marginal farmers, 7.5% to micro units etc. PSLCs are intended to enhance lending to these activities under priority sector. For more details on priority sector lending please see here.
Government of India vide Notification dated February 04, 2016 has specified “Dealing in Priority Sector Lending Certificates (PSLCs) in accordance with the Guidelines issued by Reserve Bank of India” as a form of business under Section 6 (1)(o) of the Banking Regulation Act, 1949 for banks to engage in.
Background & Rationale
The idea of issuing priority sector lending certificates first appeared in the Report of the Dr. Raghu Ram Rajan led Committee on Financial Sector Reforms – A Hundred Small Steps. The Committee proposed the PSLC scheme to allow a more efficient implementation of the priority sector lending mandate (with similar schemes extending to possible financial service mandates also). Any registered lender (including microfinance institutions, cooperative banks, banking correspondents, etc.) who has made loans to eligible categories would get ‘Priority Sector Lending Certificates’ (PSLC) for the amount of these loans. A market would then be opened up for these certificates, where deficient banks can buy certificates to compensate for their shortfall in lending. Importantly, the loans would still be on the books of the original lender, and the deficient bank would only be buying a right to undershoot its priority sector-lending requirement by the amount of the certificate. If the loans default, for example, no loss would be borne by the certificate buyer. The merit of this scheme is that it would allow the most efficient lender to provide access to the poor, while finding a way for banks to fulfil their norms at lower cost. Essentially the PSLC will be a market-driven interest subsidy to those who make priority sector loans. It is an innovative instrument designed in a market friendly way for achieving a socialistic / welfare goal.
The Reserve Bank of India, under the governorship of Dr. Raghu Ram Rajan, later comprehensively revised the priority sector guidelines in April 2015 which provided for the introduction of PSLCs as a mechanism to incentivize banks having surplus in their lending to different categories of priority sector. On lines of carbon credit trading, the goal of PSLCs is to allow market mechanism to drive priority sector lending by leveraging the comparative strength of different banks. For instance, a bank with an expertise in lending to small farmers can over perform there and get benefit by selling its over performance through PSLCs. Another bank that is better at lending to small industry can buy these certificates while selling PSLCs for micro enterprise loans.
Types of PSLCs:
There would be four kinds of PSLCs :–
- PSLC Agriculture: Counting for achievement towards the total agriculture lending target.
- PSLC SF/MF: Counting for achievement towards the sub-target for lending to Small and Marginal Farmers.
- PSLC Micro Enterprises: Counting for achievement towards the sub target for lending to Micro Enterprises.
- PSLC General: Counting for achievement towards the overall priority sector target.
|S.No.||Type of PSLCs||Representing||Counting for|
|1.||PSLC - Agriculture||All eligible Agriculture loans except loans to Small and marginal farmers (SF/MF) for which separate certificates are available||Achievement of agriculture target and overall PSL target|
|2.||PSLC - SF/MF||All eligible loans to small/marginal farmers||Achievement of SF/MF sub-target, agriculture target and overall PSL target|
|3.||PSLC - Micro Enterprises||All eligible Loans to Micro Enterprises||Achievement of micro-enterprise sub-target and overall PSL target|
|4.||PSLC - General||The residual priority sector loans i.e. other than loans to agriculture and micro enterprises for which separate certificates are available||Achievement of overall PSL target|
All PSLCs will expire by March 31st and will not be valid beyond the reporting date (March 31st), irrespective of the date it was first sold.
Trading in PSLC
On 7 April 2016, RBI issued instructions on trading in Priority Sector Lending Certificates. Reserve Bank also launched a platform to enable trading in the certificates through its Core Banking Solution (CBS) portal (e-Kuber). All Scheduled Commercial Banks (including Regional Rural Banks), Urban Co-operative Banks, Small Finance Banks (when they become operational) and Local Area Banks are eligible to participate in the trading.
Four kinds of PSLCs, namely, PSLC - Agriculture, PSLC – Small & Marginal Farmers, PSLC – Micro Enterprises and PSLC - General can be bought and sold via the platform. Thus, a bank having shortfall in achievement of any sub-target (e.g. SF/MF, Micro), will have to buy the specific PSLC to achieve the target. However, if a bank is having shortfall in achievement of the overall target only, it may buy any of the available PSLCs. The buyer would pay a fee to the seller which will be market determined.
The certificates will have a standard lot size of ₹25 lakh and multiples thereof. There will be no transfer of credit risk on the underlying as there is no transfer of tangible assets or cash flow. The settlement of funds will be done through the e-Kuber portal.
As per RBI's annual report, the PSLC platform recorded active participation from all the eligible entities including urban co-operative banks and small finance banks during 2016-17. In the first year itself, about ₹1,265 billion worth of offers were put on the PSLC platform, out of which roughly ₹498 billion worth of offers were settled. Among the four PSLC categories, the highest trading was observed in case of PSLC – Small & Marginal Farmer, and PSLC – General Categories, with the transaction volumes being ₹229.9 billion and ₹200.2 billion, respectively. An expected cyclical trend, however, was observed in the trading volume, which peaked mostly in the last month of every quarter. More than 15 per cent of trade happening under PSLCs is by Small Finance Banks (SFBs).
- Trading instructions for PSLC issued by RBI
- Report of the Dr. Raghu Ram Rajan led Committee on Financial Sector Reforms – A Hundred Small Steps