Priority Sector Lending

Priority Sector Lending

This article deals with ‘Priority Sector Lending .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

Introduction

  • Basic principle in Economics = No Risk No Reward & High Risk High Reward .
  • Hence, Banks will charge high rate of interest from farmers, students , small entrepreneurs etc. or they will never get loans . To tackle this, RBI in 1980s came with PSL norms .

Who are covered under Priority Sector Lending (PSL) ?

Priority Sector Lending
  • Domestic Scheduled Commercial Bank (Public and Private) = 40%
  • Foreign Scheduled Commercial Bank (SCB) = 40%
  • RRB = 75 %
  • Small Finance Banks – 75%
  • Cooperative Banks = No Requirement

What includes PSL ?

Category % SCB  
Weaker Sections 10%  
Agriculture & Allied Activities 10%  
Marginal Farmer & Small farmer 8% – Added as new category in April 2016 .
– Earlier Agriculture and Allied Activities was given 18% but due to broad category, small & marginal farmers weren’t getting anything.  
Micro Enterprise – Khadi-Village industry 7.50%  
All other PSL categories 4.5% These include
1. Small & Medium Enterprises
2. Affordable housing loans to beneficiaries under PMAY
3. Food processing companies
4. Vermi compost, biofertilizer, seed production
5. Student-Education loans (upto Rs.10 lakh)
6. Social Infrastructure (schools, health care, drinking water, sanitation facilities)
7. Renewable Energy Projects (wind mills,  solar  etc.)  
Total PSL 40%  

Note : For Foreign Banks with less than 20 branches , 40% PSL is there  but there is no internal classification. Their consolidated PSL should be 40%.

Benefits of Priority Sector Lending

  • It helps in channelising credit to the Vulnerable Section .
  • PSL helps in Financial Inclusion .
  • PSL provides higher Social Returns on lending .
  • It helps in diversification  of Credit Portfolio of government
  • Credit Formalisation : It helps in breaking the hold of non-institutional lenders especially in rural areas.

Issues with Priority Sector Lending

  • Rising NPA : Second Narsimham Committee (1998 )  observed that  47% of all NPA  have come from PSL . It also recommended to end the system of PSL for the betterment of Banking Sector.
  • Lethargy in Lending: Most bank seem reluctant to lend to the priority sectors .
  • Not used for intended purpose especially in Agriculture sector. Loan given to farmers under PSL is to increase productivity, but it is used for unproductive purposes like marriages and other social obligations.
  • Targeting issues : Suitcase farmers benefitted instead of poor farmers .
  • Deter banks from  expanding their scale of lending as more they lend, more they will have to contribute in PSL .

What if PSL quota is not met ?

Mostly banks aren’t able to meet their PSL quotas. In this case, they have to invest the remainder in RIDF or SIDF as the case may be

Indian Banks + Foreign banks (with 20 or more branches) RIDF =Rural infra. Development fund
Managed by NABARD
For funding rural infrastructure projects  
Foreign bank with less than 20 branches. SEDF = Small Enterprises development fund
– Managed by SIDBI  

But  problem with both of the above is , money is given for long term ie around 20 years. Hence,  banks money is gone for long time which they cant use & as a result , they suffer in the meantime

To Address this, RBI came with Priority Sector Lending Certificates:-

Priority Sector Lending Certificates

  • In this arrangement, the overachieving Banks can sell their excess PSL in form of ‘certificates’ to underachieving banks without transferring the loan assets or its risk.
Priority Sector Lending Certificates
  • Four kinds of PSLCs are traded through RBI’s e-Kuber Portal, viz
    • Agriculture (PSLC-A)
    • Small and Marginal Farmers (PSLCSM)
    • Micro Enterprises (PSLC-ME)
    • General (PSLC-G). 

(Note – In future , one of the work of wholesale Banks would be to give large loans in PSL sector and then sell PSL certificates through this facility. )