Priority Sector Lending (PSL) is a way to provide higher priority to certain economic sectors in the country. Priority Sector Lending aims to provide institutional credit to such sectors and segments for whom it is challenging to avail credit. In other words, the Priority Sector means those sectors that the GoI and RBI consider important for the development of the country’s basic needs. These are to be given priority over other sectors.
What is Priority Sector Lending?
Priority sector lending (PSL) is lending to those sectors of the economy which may not otherwise receive timely and adequate credit. This role is assigned by the RBI to the banks for providing a specified portion of the bank lending to a few specific sectors. This is essentially meant for an all-round development of the economy as opposed to focusing only on the financial sector.
History of PSL
- The priority sector started gaining popularity in 1972, right after the National Credit Council’s plea that commercial banks should give more emphasis to the priority sector.
- Initially, in 1974, the commercial banks were given a target of 33.33% of their total credit should be driven towards the priority sector.
- Following the recommendations of Dr K S Krishnaswamy Committee, this target was later revised to 40% of the total credit given by the banking institutions.
- The latest revision in private sector lending targets was made in 2012 by the M V Nair Committee.
What are the Different Categories of the Priority Sector?
- Agriculture
- Micro, Small and Medium Enterprises
- Export Credit
- Education
- Housing
- Social Infrastructure
- Renewable Energy
- Others
Activities Covered Under Priority Sector Lending in India
- Agriculture: Loans provided for farming activities, including crop cultivation, animal husbandry, fisheries, and other allied agricultural activities.
- Micro, Small, and Medium Enterprises (MSMEs): Credit extended to micro, small, and medium enterprises. It includes loans for starting new businesses, working capital requirements, and expansion purposes.
- Education: Loans granted for education-related expenses, including tuition fees, purchase of books, payment for educational courses, and other educational purposes.
- Housing: Lending for housing finance, including loans for the purchase, construction, or renovation of residential properties.
- Export Credit: Financing provided to exporters to facilitate international trade. It includes pre-shipment and post-shipment credit, export working capital, and other export-related financial services.
- Renewable Energy: Loans extended for renewable energy projects such as solar power, wind power, biomass, and other clean energy initiatives.
- Healthcare: Credit support for healthcare infrastructure development, including funding for hospitals, clinics, medical equipment, and healthcare services.
- Social Infrastructure: Financing for social infrastructure projects such as schools, colleges, vocational training centers, and other community development initiatives.
- Loans to Weaker Sections: Special focus on providing credit to marginalized and economically weaker sections of society. It includes Scheduled Castes, Scheduled Tribes, and Other Backward Classes.
New Guidelines of Priority Sector Lending
ome of the key features of the new PSL guidelines are as follows:
- The RBI has increased the mandatory PSL target for all scheduled commercial banks from 40% to 40% of adjusted net bank credit (ANBC). ANBC is a broader measure of bank credit. It includes loans, investments, and other advances.
- The RBI has introduced sub-targets for lending to the weaker sections under the PSL. Under the new guidelines, banks are required to lend at least 15% of their ANBC to the weaker sections.
- The RBI has introduced differential weightage for lending to certain sectors under the PSL. This means that banks will get more credit for lending to certain sectors. This includes agriculture, micro and small enterprises (MSMEs), and export credit.
- The RBI has introduced incentives for banks to lend to underserved areas. For example, banks will get more credit for lending to districts with low per capita PSL credit.
- The RBI has enhanced the monitoring and reporting requirements for PSL. Banks are now required to submit more detailed reports on their PSL lending to the RBI.
FAQs
What is Priority Sector Lending (PSL)?
Priority Sector Lending (PSL) is a banking concept where a certain percentage of the total credit is directed towards specific sectors that are considered important for the overall economic development of the country. These sectors include agriculture, micro, small, and medium enterprises (MSMEs), education, housing, and others. PSL aims to ensure that credit reaches underdeveloped and underserved sections of the economy.
What is the minimum target for Priority Sector Lending?
Banks in India are required by the Reserve Bank of India (RBI) to allocate a certain percentage of their total credit to priority sectors. As of the latest guidelines:
- 40% of total credit must be directed towards the priority sector for scheduled commercial banks.
- For regional rural banks (RRBs) and small finance banks, the target is slightly higher at 75%.
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