What is Priority Sector Lending (PSL)?

June 25, 2024

The RBI recently revised its priority sector guidelines to encourage banks to provide small loans in economically disadvantaged districts with low average loan sizes.

About Priority Sector Lending (PSL):

  • PSL is a lending requirement administered by the RBI, requiring banks to give a minimum proportion of their loans to sectors of development importance or the sectors that have difficulty of getting loans.
  • The RBI is periodically updating the sectors that are eligible to get priority sector lending and the limits of loans. 
  • Similarly, the regulations identify institutions that are obliged to provide these loans. 
  • The categories of priority sectors are as follows:
    • Agriculture
    • Micro, Small, and Medium Enterprises
    • Export Credit
    • Education
    • Housing
    • Social Infrastructure
    • Renewable Energy
    • Others
  • The targets under PSL:
    • Domestic SCBs and foreign banks with 20 branches and above: 40 percent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE), whichever is higher.
    • Foreign banks with less than 20 branches: 40 percent of ANBC or CEOBE, 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.
    • Regional Rural Banks and Small Finance Banks: 75 percent of ANBC or CEOBE, whichever is higher.
    • Primary (Urban) Co-operative Banks (UCBs): 40 percent of ANBC or CEOBE, whichever is higher, which shall be increased to 75 percent of ANBC or CEOBE, whichever is higher, with effect from FY2025-26.
  • Banks can meet their PSL obligations by extending loans, providing credit facilities, and offering financial products and services to individuals, entities, and enterprises in the priority sectors. 
    • They can also fulfil their targets through investments in eligible instruments, such as bonds issued by entities engaged in priority sector activities. 
  • In case, banks fail to meet their PSL targets, they have to deposit the allocated amount to the Rural Infrastructure Development Fund (RIDF) established with NABARD and to other funds with NABARD, SIDBI, Mudra, National Housing Bank, etc., as decided by the RBI from time to time.
  • What are Priority Sector Lending Certificates (PSLCs)?
    • PSLCs are certificates that are issued against priority sector loans for banks.
    • They allow banks to meet their targets and sub-targets when it comes to priority sector lending by buying the instruments.
    • The banks use PSLCs to guard against shortfalls.
    • The lending certificates also incentivize, through surplus, to lend more to priority sectors.

Revised RBI Guidelines:

  • The new norms discourage lending in districts with high average loan sizes.
  • Starting from FY25, more weight (125%) will be given to fresh priority sector loans in districts where the loan availability is low (less than Rs 9,000 per person).
  • In districts with high loan availability (more than Rs 42,000 per person), the loans will have a weight of 90%.
  • With the exception of outlier districts with low credit availability and those with high loan sizes, all other districts will continue to have the current importance level of 100%.