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Introduction

  • Priority sectors are those sectors in an economy that the Reserve Bank of India and the Government  consider as important for the development of the country.
  • The identified priority sectors are given priority over other sectors in various spheres like- economic or financial, administrative or on the ground of policy formulation.
  • Under the priority sector lending, the RBI mandates the banks to encourage the growth of such  identified sectors with adequate and timely credit.

 

A Brief History of Priority Sector Lending in India

  • The origins of priority sector lending can be traced back to 1966 when Morarji Desai saw a need for increasing credit to agriculture and small industries.
  • However, the definition for priority sector was formalised based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972.
  • In 1974, the commercial banks were given a target of 33.33% of their ANBC, which was increased to 404 of ANBC on the recommendations of Dr. K.S. Krishnaswamy committee.
  • After nationalisation of banks, the priority sector formulation also allowed Indira Gandhi, the then prime minister of India, to satisfy important political lobbies.
  • The priority sector definition grew over time, and was not just limited to important lobby groups, but extended to cover important neglected sectors of the economy.
  • However, despite the tweaks, till today, the classification retains a heavy focus on agriculture and small industries (defined as micro, small and medium enterprises or MSME).

 

Priority Sector Lending Categories

  • Agriculture 
  • Export Credit 
  • Micro, Small and Medium Enterprises 
  • Education (Loans to individuals for educational purposes up to Rs. 10 lakh) 
  • Housing (Housing loans to individuals loan up to Rs.28 Lakh in Metros, Rs.20 Lakh in other centers) 
  • Social Infrastructure (Loans up to ₹5 crores per borrower for building social infrastructure) 
  • Renewable Energy (for individual households, the loan limit will be ₹10 lakh per borrower, Loan up to Rs. 15 crore for purposes like solar-based power generators etc.)
  • The RBI has also given priority sector lending status to start-ups.

 

Important Points

  • PSL does not apply to Regional Rural Banks (RRB) and Small Finance Banks (SFB) because these banks are already working in the sector which are defined in PSL norms.
  • The RBI will determine the interest rate for bank loans in the priority sector. 
  • If the Banks fail to meet its PSL target, then banks may be required to invest in the Rural Infrastructure Development Fund (RIDF). 
  • Banks can purchase Priority Sector Lending Certificates (PSLCs) in the event of a shortfall, allowing them to satisfy the priority sector lending target and sub targets. This encourages surplus banks to sell excess achievement beyond targets, resulting in more lending to the priority sector. 
  • The PSLC method allows the seller to sell the fulfillment of a priority sector obligation to the buyer without transferring any risk or loan assets.