Priority Sector Lending

What is PSL?

Banks were assigned a special role in the economic development of the country, besides ensuring the growth of the financial sector. The banking regulator, the Reserve Bank of India, has hence prescribed that a portion of bank lending should be for developmental activities, which it calls the priority sector.

Categories under priority sector

  • Agriculture
  • Micro, Small and Medium Enterprises
  • Export Credit
  • Education
  • Housing
  • Social Infrastructure – loans up to Rs.5 crore per borrower for building schools, healthcare facilities, drinking water facilities and sanitation facilities in smaller centers.
  • Renewable Energy – loans up to Rs.15 crore to borrowers for solar, biomass, wind, micro-hydel plants and for non-conventional energy-based public utilities like street lighting systems, and remote village electrification.
  • Others – includes loans to weaker sections, PMJDY account holders, MFIs, SHGs, Persons with Disabilities, Minority communities etc.


  • There are specific sub-targets for each of these categories.
Minimum limits for priority sector lending
  • The limits are prescribed according to the ownership pattern of banks as can be seen below –
  • According to RBI guidelines issued on 23 April, 2015 – the overall priority sector lending target for all banks is set at 40%, while for foreign banks having under 20 branches, the target has been set at 32%.
Penal action
  • Scheduled Commercial Banks having any shortfall in lending to priority sector shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with NABARD/NHB/SIDBI/MUDRA Ltd., as decided by the Reserve Bank from time to time.
Issues regarding Priority Sector Lending
  • It has been observed that while banks often tend to meet the overall priority sector targets, they sometimes tend to miss the sub-targets.
  • This is particularly true in case of domestic banks failing to meet their sub-targets for agricultural advances. One of the reasons banks often site for not lending to this sector is that recovery is often difficult.
Recent changes in PSL norms:
Recently, the Reserve Bank of India (RBI) notified the new priority sector lending norms which are as under:
  1. loans to sectors such as social infrastructure, renewable energy and medium enterprises will be treated as PSL; thus adequate attention has been paid to emerging priorities such as climate change, social inequality and fund scarcity among MSEs
  1. while retaining a 40% PSL target for domestic banks, the distinction between direct & indirect agriculture has been dispensed with; a sub target of 8% for small & marginal farmers within agriculture, a target of 7.5% & 10% for micro-enterprises & weaker sections has been prescribed; thereby adopting a more holistic approach towards agriculture. However banks will be inclined towards lending agro-companies who are more creditworthy than individual (medium & large) farmers.
  2. PSL targets of foreign banks at 40% with sub-targets being applicable for banks having more than 20 branches. Further, they have been given a 5 year timeline to achieve the targets. RBI has adopted a incremental and balanced approach, thus ensuring fair competition along with retaining the attractiveness of the sector for foreign banks.
Concern about these changes:
However, concerns remain especially over how the banks are going to implement these provisions especially when their balance sheets are unhealthy and levels of NPA are unacceptably high. Also, banks may not reach their targets due to presence of MUDRA with the same objective. Positive impact of the shift would be- it makes it hard for banks to miscalculate under sectoral lending. Refining through sub-targeting would help those like marginal farmers get their due.
Issue with PSL?
PSL often turn into bad loans, the lending norms are complex and depositing money with RIDF doesn’t yield much benefit, so most banks are unwilling to extend Priority Sector Loans(PSL)
What is RBI’s solution for all this?
RBI permitted issue and trading of PSL certificates (first mooted in Raghuram Rajan Committee report) recently. The significance of this initiative are:
  •  Banks can issue loans more than its PSL guidelines to their area of specialization say hand looms and sell the extra amount as certificates to other banks who have to meet their quota of such loans but do not have the specialization to do so
  • It will be help in category specific targeting and hence efficient loan extension. Moreover, if the prices in a certain sector see sudden downturn, then only a specific bank’s recovery would be affected instead of all banks i.e. the buyer of the certificates won’t carry the risk of loans
  • Since margin trading of certificates is allowed, RBI has to periodically review the PSL certificate market to ensure any bank doesn’t float out excess certificates to maximize its fee income and get exposed to severe risk
Concern about these changes:
  • No risk associated with buyer,
  • sudden downturn in one sector can cause harm due to excess concentration of exposure,
  • exchange markets experience are marred by memories of Harshad Mehata scam in 90s and currency derivatives of 2008.


So rightly RBI has allowed margin trading but upto a limit only and also quarterly review of the market.

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