Priority Sector Lending

IN NEWS:

• The Reserve Bank of India (RBI) has brought startups under the purview of priority sector lending (PSL).
• This move will benefit over 1000s of small startups to raise funds from banks.

About PSL:

• Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors.

Which banks are covered under PSL?

• Domestic scheduled commercial banks, cooperative banks and foreign banks - 40 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure whichever is higher.
• Small Finance Banks & Regional Rural Banks – 75 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure whichever is higher.
• Payment Banks do not have PSL targets.

Priority Sector includes the following categories:

• Agriculture
• Micro, Small and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others i.e. Scheduled Castes and Scheduled Tribes, Persons with disabilities etc.
• Bank credit to Micro Finance Institutions (MFIs) extended for on-lending to individuals and also to members of SHGs is eligible for categorisation as priority sector advance.

What happens when banks fail to meet PSL norms?

• To the extent of shortfall in the achievement of target, banks may be required to invest in Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD or National Housing Bank (NHB) or Small Industries Development Bank of India (SIDBI) or Micro Units Development Refinance Agency Bank (MUDRA Ltd)., as decided by the Reserve Bank from time to time, or purchase priority sector lending certificates (PSLC).

Priority Sector Lending Certificates (PSLCs)

• Priority Sector Lending Certificates (PSLCs) are tradable certificates issued against priority sector loans of banks.
• It enables 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.

Rate of interest for loans under priority sector

• The rate of interest will be as per directives issued by the Department of Banking Regulation of RBI from time to time.
• Priority sector guidelines do not lay down any preferential rate of interest for priority sector loans.

PRELIMS QUESTION

Which of the following are included in priority sector lending as notified by RBI:
1.Agriculture
2.Renewable energy
3.Export Credit
4.Education
Select the correct answer using the code given below:
(a)1,2 and 3 only
(b)2,3 and 4 only
(c)1,2 and 4 only
(d)1,2,3 and 4

Answer to prelims question