Priority Sector Lending RBI
Priority sector lending UPSC forms and important segment of banking system in India, which is an important part of UPSC GS paper 3 syllabus. Besides, it is also important for various state PCS examinations and regulatory body examinations like RBI, NABARD, apart from other competitive examinations. Irrespective of what you are preparing for, priority sector lending is one of the topics you shouldn’t miss! In this article, we will discuss the various points about the PSL that could be important for various examination.
What is Priority sector lending?
- Priority Sector are those sectors that the Government of India and Reserve Bank of India consider as important for the development of the basic needs of the country and are to be given priority over other sectors.
- So, under priority sector lending, the banks are mandated to encourage the growth of such sectors with adequate and timely credit.
Priority sector lending in India: History
- 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
Priority sector lending by banks in India constitutes the lending to
- Agriculture
- Micro, Small and Medium Enterprises
- Export Credit
- Education
- Housing
- Social Infrastructure
- Renewable Energy
- Others
Priority sector lending 2015: Priority sector lending targets
- The targets and sub-targets set under priority sector lending for all scheduled commercial banks operating in India are furnished below:
| Categories | Domestic scheduled commercial banks and foreign banks with 20 branches and above | Foreign banks with less than 20 branches | Regional Rural Banks | Small Finance Banks |
| Total Priority Sector | 40 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. | 40 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher; out of which up to 32% can be in the form of lending to Exports and not less than 8% can be to any other priority sector | 75 per cent of ANBC. However, lending to Medium Enterprises, Social Infrastructure and Renewable Energy shall be reckoned for priority sector achievement only up to 15 per cent of ANBC. | 75 per cent of ANBC. |
| Agriculture | 18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
Within the 18 per cent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers. |
Not applicable | 18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. | 18 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. |
| Micro Enterprises | 7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher | Not applicable | 7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher | 7.5 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher |
| Advances to Weaker Sections | 12 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher | Not applicable | 15 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher | 12 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher |
PSL targets for UCB: Targets for priority sector lending by Primary (Urban) Co-operative Banks (UCBs)
- Total Priority Sector – 40 per cent of ANBC or CEOBE, whichever is higher, which shall stand increased to 75 per cent of ANBC, with effect from March 31, 2024
- Micro Enterprises – 7.5 per cent of ANBC.
- Advances to Weaker Sections -12 per cent of ANBC.
Education
- Loans to individuals for educational purposes, including vocational courses, not exceeding Rs 20 lakh will be considered as eligible for priority sector classification.
Housing
- Loans to individuals up to Rs 35 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs 25 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 Rs 45 lakh and Rs 30 lakh respectively.
Social infrastructure
- Bank loans up to a limit of Rs 5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc. and loans up to a limit of Rs 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres.
Renewable Energy
- Bank loans up to a limit of Rs 30 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 etc., will be eligible for Priority Sector classification.
- For individual households, the loan limit will be Rs 10 lakh per borrower.
Revised priority sector lending guidelines
- RBI has revised the PSL categories and credit limit in 2020 by taking into consideration the recommendations made by the UK Sinha led expert committee on MSMEs.
New categories
- Bank finance to start-ups up to Rs. 50 crore,
- loans to farmers for installation of solar power plants for solarisation of grid connected agriculture pumps, and
- loans for setting up Compressed BioGas plants.
Increased credit limit
- For health infrastructure, limit has been increased to 10 crores, while for renewable energy, the limit has been increased to 30 crores.
- Banks can also give loans upto 5 crores for setting up schools, drinking water and sanitation facilities.
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