Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Module I: Basics of Credit and Credit Process

Chapter 8: Priority Sector Lending

Dr R Bhaskaran

Objective

The objective of this chapter is to discuss the priority sector lending scheme (PSLS)
implemented by the Reserve Bank of India (RBI).

Structure

The chapter has been organised into the following five sections:

1. Introduction
2. RBI Guidelines on PSL
3. Priority Sector Lending Certificate (PSLC)
4. Monitoring of PSL Targets
5. Summary and Conclusion

1. Introduction

Historically banks have been providing loans liberally to big companies and neglecting
other sectors like agriculture and small enterprises. Two major reasons for lack of
interest among banks could be risk aversion and high operating cost of managing small
loans. Therefore, the government had to promulgate regulations for banks to
necessarily lend a certain portion of their loan portfolio to the neglected sectors. One
extreme action by the Government of India in this regard was nationalisation of banks.
The government of India had constituted several committees for channelling bank
credit to the needy sectors and had announced several schemes for the purpose. One
such scheme is the Lead Bank Scheme and another major scheme is the PSL scheme. Yet
another scheme announced in the recent past is the Priority Sector Lending Certificate
(PSLC) scheme.

Priority Sector refers to those sectors of the economy which may not get timely and
adequate credit unless the lending institutions are directed to lend to these sectors.
Reserve Bank of India (RBI) has made it mandatory for the banks to provide a specified
portion of their total loans and advances portfolio to certain sectors. This is meant for
achieving all round and inclusive development of the economy. Targets for PSL was set
in 1974 for the first time in India and the overall target was 33.3%. Later it was revised
to 40% in 1980. The scope and extent of the scheme have been changed several times
and the latest guidelines on PSL are discussed in the next section.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Directing banks to provide credit to specific sectors is not unique to India only. In other
countries it is called directed lending and is in vogue in many countries including
developed and developing countries. The various forms of directed lending are as
follows:

 Sectoral lending programmes designed to channel bank finance to a specific

sector or a section of the society
 Administered interest rate programmes. Directing banks to lend money to
certain sectors or sections of the society at a lower rate of interest. In some cases,
the government may subsidise the interest. For example, interest on agriculture
loans is subsidised by the Government of India.
 Refinance programmes. Loans given to certain sectors will be refinanced by the
government or by the institutions created for the purpose. In India, NABARD,
SIDBI, NHB and MUDRA provide refinance.
 Development financial institutions (DFI)/Public sector banks. Financial
institutions created for the purpose of providing loans to the target sectors.
NABARD, SIDBI, NHB and MUDRA are examples. Regional Rural Banks (RRBs) is
another example. RRBs have been established for the purpose of providing bank
credit in the rural areas.
 Credit guarantee programmes. One primary concern of banks in providing loans
to certain sectors is the risk and lack of collateral for covering the risk. Credit
guarantee will help overcome this problem. CGTMSE is a case in point. Similar
credit guarantee schemes have been designed for MUDRA loans and education
loans, and loans to startups.

2. RBI Guidelines on PSL

Reserve Bank of India is authorised by the Government of India to issue directions to

banks regarding priority sector lending. The most recent direction is the Master
Direction –Priority Sector Lending-Targets and Classification, dated July 7, 2016. The
master direction provides all the necessary details to be followed by the banks. Few
details given in the master circular are discussed briefly hereunder. According to the
master direction the broad sectors to which commercial banks in the country are
supposed to provide credit under the PSL scheme are as under.

(i) Agriculture and allied activities

(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(vi) Others

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 Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

a. Investment in securitised assets

b. Transfer of assets through direct assignment
c. Inter Bank Participation Certificate (IBPC)
d. Loans to MFIs for on lending
e. Monitoring of PSL targets
f. Common guidelines

Table 1: Targets and Sub-Targets for Priority Sector Lending in India

Categories Domestic scheduled commercial banks Foreign banks with

and Foreign banks with 20 branches less than 20 branches
and above
Total Priority  40%of Adjusted Net Bank Credit 40% of ANBC or Credit
Sector (ANBC) or Credit Equivalent Amount of Equivalent Amount of
Off-Balance Sheet Exposure, whichever Off-Balance Sheet
is higher. Exposure, whichever is
 Foreign banks with 20 branches and higher; to be achieved in
above have to achieve the Total Priority a phased manner by
Sector Target within a maximum 2020.
period of five years starting from April
1, 2013 and ending on March 31, 2018.
Agriculture  18% of ANBC or Credit Equivalent Not applicable
Amount of Off-Balance Sheet Exposure,
whichever is higher.
 Within the 18%, 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.
 Foreign banks with 20 branches and
above have to achieve the target within
a maximum period of five years
starting from April 1, 2013 and ending
on March 31,
Micro Enterprises  7.5% of ANBC or Credit Equivalent Not Applicable
Amount of Off-Balance Sheet Exposure.
 The target for foreign banks with 20
branches and above would be made
applicable post 2018 after a review in
2017.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

Advances to  10% of ANBC or Credit Equivalent Not Applicable

Weaker Sections Amount of Off-Balance Sheet Exposure,
whichever is higher.
 Foreign banks with 20 branches and
above have to achieve the target within
a maximum period of five years
starting from April 1, 2013 and ending
on March 31, 2018.

Table 1 above shows that there are specific targets for agriculture (18% of ANBC) and
micro enterprises (7.5% of ANBC) only. Weaker sections of the society will cut across all
the sectors and hence it may be achieved by providing loans to the weaker sections
under each category including agriculture, MSMEs, exports and so on. Therefore, the
balance 14.5% of the overall target can be achieved by lending to other sectors like
exports, education, housing, etc.

Table 2: PSL Target for Foreign Banks with Less Than 20 Branches

Financial Year The Total Priority Sector as percentage of ANBC or

Credit Equivalent Amount of Off-Balance Sheet Exposure,
whichever is higher
2015-16 32
2016-17 34
2017-18 36
2018-19 38
2019-20 40

Description of Eligible Categories under PSL

The various categories of PSL are briefly described in the following paragraphs.

Agriculture: According to the RBI agriculture sector includes (i) farm credit (ii)
Agriculture Infrastructure and (iii) Ancillary Activities. 1

 Farm credit incudes loans extended to individual farmers including Self Help
Groups (SHGs) or Joint Liability Groups (JLGs) directly engaged in Agriculture
and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping
and sericulture. This includes (i) Crop loans (ii) Medium and long-term loans for

1
For details refer to RBI Master Direction – Priority Sector Lending – Targets and Classification, dated July 7, 2016.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

agriculture and allied activities (iii) Loans for pre and post-harvest activities, (iv)
Produce pledge loans up to ₹ 50 lakh (v) Loans to distressed farmers indebted to
non-institutional lenders, (vi) KCC loans, (vii) Loans to small and marginal
farmers for purchase of land for agricultural purposes.
 Loans, given to co-operatives of farmers, corporate farmers, producer
organizations/companies/partnership firms which are directly engaged in
activities mentioned up to an aggregate limit of Rs 2 Crores per farmer.

 Agriculture infrastructure: Loans up to Rs 100 Crores per borrower for

construction of storage facilities to store agriculture produce/products, Soil
conservation and watershed development, plant tissue culture and agri-
biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and
vermi-composting.
 Ancillary activities: This includes loans up to ₹ 5 crore to co-operative societies
of farmers for disposing of the produce of members, loans for setting up of Agri
clinics and Agribusiness Centres, Loans for Food and Agro-processing up to an
aggregate sanctioned limit of ₹ 100 crore per borrower from the banking system,
Loans to Custom Service Units managed by individuals, institutions or
organizations who maintain a fleet of tractors, bulldozers, well-boring
equipment, threshers, combines, etc., and undertake farm work for farmers on
contract basis, loans extended by banks to Primary Agricultural Credit Societies
(PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi-Purpose
Societies (LAMPS) for on-lending to agriculture, Loans sanctioned by banks to
MFIs for on-lending to agriculture sector as per the conditions specified and
outstanding deposits under RIDF and other eligible funds with NABARD on
account of priority sector shortfall.

Micro, Small and Medium Enterprises (MSMEs): Micro, Small and Medium
Enterprises have been defined by GOI on the basis of investment in plant and
machinery/equipment for manufacturing / service enterprise, as under:

Manufacturing Sector Service Sector

Enterprises Investment in plant and Investment in equipment
machinery
Micro Enterprises Less than Rs 25 lakhs Less than Rs 10 Lakhs
Small Enterprises Rs 25 to Rs 5 crore Rs 10 Lakh to Rs 2 Crore
Medium Rs 50 Lakhs to Rs 10 Crore Rs 2 Crore to Rs 5 Crore
Enterprises

Loans to MSME in manufacturing & service sectors can be classified under the priority
sector as follows:

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

 Manufacturing Enterprises: The MSME should be engaged in the manufacture

or production of goods to any industry specified in the first schedule to the
Industries (Development and Regulation) Act, 1951.
 Service Enterprises: Bank loans up to ₹ 5 crore per unit to MSE and ₹ 10 crore
to Medium Enterprises engaged in providing or rendering of services.
 Khadi and Village Industries Sector (KVI): All loans to units in the KVI sector
will be eligible for classification under the sub-target of 7.5 percent prescribed
for Micro Enterprises.
 Other Finance to MSMEs
(i) Loans to entities involved in assisting the decentralized sector in the
supply of inputs to and marketing of outputs of artisans, village and
cottage industries,
(ii) Loans to co-operatives of producers in the decentralized sector viz.
artisans, village and cottage industries,
(iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector.
(iv) Credit outstanding under General Credit Cards, Artisan Credit
Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver’s Card
(v) Overdrafts extended by banks upto Rs. 5,000 under Pradhan Mantri Jan
Dhan Yojana (PMJDY) accounts. These overdrafts will qualify as
achievement of the target for lending to Micro Enterprises,
(vi) Outstanding deposits with SIDBI and MUDRA Ltd. on account of
priority sector shortfall.

Export Credit: Pre-shipment and post shipment export credit extended by domestic
banks not exceeding 2% of ANBC and subject to a limit of Rs 25 Crore per borrower to
units having turnover upto Rs. 100 crore.

Education: Loans to individuals for educational purposes including vocational courses

upto ₹ 10 lakh irrespective of the sanctioned amount will be considered as eligible for
priority sector.

Housing: The following are the items eligible to be treated as PSL:

(i) Loans to individuals up to ₹ 28 lakh in metropolitan centres and loans up to ₹

20 lakh in other centres for purchase/construction of a dwelling unit per
family.
(ii) Loans for repairs to damaged dwelling units of families up to ₹ 5 lakh in
metropolitan centres and up to ₹ 2 lakh in other centres.
(iii) Loans to any governmental agency for construction of dwelling units or for
slum clearance and rehabilitation of slum dwellers subject to a ceiling of ₹ 10
lakh per dwelling unit.

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

(iv) Loans for housing projects exclusively for the purpose of construction of
houses for economically weaker sections, defined in terms of income, and low
income groups
(v) Bank loans to Housing Finance Companies (HFCs), for on-lending for housing
purposes
(vi) Outstanding deposits with NHB on account of priority sector shortfall.

Social infrastructure: Loans up to a limit of ₹ 5 crores per borrower for building social
infrastructure for activities. Credit extended to Micro Finance Institutions (MFIs) for on-
lending for the purpose of water and sanitation facilities is also eligible under this
category.

Renewable Energy: Bank loans up to a limit of ₹ 15 crores 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. For individual households loan upto Rs.10
lakh per borrower is eligible.

Others

(i) Loans not exceeding ₹ 50,000/- per borrower provided directly by banks to
individuals and their SHG/JLG.
(ii) Loans to distressed persons not exceeding Rs. 100,000 per borrower
(iii) Loans sanctioned to State Sponsored Organisations for SC/ST for purchase
and supply of inputs and/or marketing of outputs of beneficiaries of these
organisations.

Weaker Sections: In the above loans banks should ensure that 10 percent of ANBC or
Credit is given to weaker section as defined in the RBI circular

Investments in approved funds etc.

In addition subject to details contained in the RBI circular (a) Investments by banks in
securitised assets, (b) Transfer of Assets through Direct Assignment /Outright
purchases, (c) Inter Bank Participation Certificates (IBPCs) bought by banks on risk
sharing basis, (d) Priority Sector Lending Certificates, ( e) Loans to MFI for on-lending
will all be reckoned for priority sector coverage.

For more details please refer to the RBI Master Direction on priority sector lending
https://rbidocs.rbi.org.in/ rdocs/notification/PDFs/ 33MD08B3F0C
C0F8C4CE6B844B87F7F 990FB6.PDF

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

3. Priority Sector Lending Certificate (PSLC)

The genesis for the PSLC scheme can be found in The Raghuram Rajan Committee
Report on Financial Sector Reforms (2008). The committee had recommended the
introduction of PSLC in order to make use of the comparative strength of banks and
financial institutions in lending to the priority sector. The committee was of the view
that those institutions good at lending to the priority sector shall focus on the same.
Banks and institutions which were able to exceed the PSL target will be issued with the
PSLC. Those banks which are not able to achieve the PSL targets may buy the PSLC to
offset their shortfall. This arrangement will enable each bank to do their business well
utilising their core strengths and at the same time desired amount of bank loans are
directed to the priority sectors in the country. The RBI has launched an online platform
called e-Kuber for trading in PSLCs on April 7, 2016. Within one year of its launch
(April 2016 – March 2017) a volume of around Rs. 43,000 crore has been traded on the
e-Kuber.

Types of PSLCs: The following four types of PSLCs are available for trading:

 PSLC Agriculture
 PSLC for small and marginal Farmers (PSLC SF/MF)
 PSLC Micro Enterprises
 PSLC General

The above mentioned PSLCs will enable banks to fulfil the overall target as well the sub-
targets. In course of time PSLC on other specific sectors may also be issued.

4. Monitoring of PSL Targets

The PSL target and sub targets will be monitored by the RBI on quarterly basis. If a bank
has any shortfall in achieving the PSL target the bank will be directed to deposit an
amount equivalent to the shortfall in the Rural Infrastructure Development Fund (RIDF)
established with the NABARD or SIDBI or NHB or MUDRA Bank as may be appropriate.
It may be noted that the interest offered by RIDF is set by the RBI. The rate is linked to
the bank rate and it may be in the range of bank rate minus 2% to bank rate minus 5%.
The rate of interest will be determined depending on the shortfall and it can also be
negative. The rate of interest on deposits into RIDF, tenure of deposits, etc will be fixed
by the RBI from time to time.

5. Summary and Conclusion

Historically, commercial banks have been lending to corporates and were not interested
in lending to small borrowers like farmers and micro enterprises. Governments, on
other hand, are interested in achieving balanced and inclusive growth and hence
wanted to provide bank credit to all the needy sectors and sections of the society.
Various methods are adopted by different nations to ensure the flow of credit to the

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Course: Credit Management (Module I: Basics of Credit and Credit Process) NIBM, Pune

needy sectors. Among other schemes Government of India is implementing the PSL
scheme through the RBI. The sectors to which commercial banks in the country are
supposed to provide credit under the PSL scheme are Agriculture, MSMEs, Export,
Education, Housing, Social Infrastructure, Renewable Energy, and others. To facilitate
the banks to achieve the PSL targets efficiently the RBI has introduced a trading scheme
called PSLC and an online trading platform for the same called e-Kuber. The
achievement of PSL targets by the banks is monitored by the RBI on quarterly basis and
any shortfall in the target will have to be offset by depositing money into RIDF. The
objective of RIDF is to penalise the banks which are not able to achieve the PSL targets
and hence the rate of interest offered by the RIDF is very low.

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