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. M. Manickaraj

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

1.0 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 (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 start-ups.

2.0 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 Enterprise
(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

Apart from lending directly to the above categories classified as priority sectors, RBI
allows banks to the following activities for achieving PSL targets subject to certain conditions.

a. Investment in securitised assets, representing loans to the abovementioned

priority sectors except ‘others’
b. Transfer of assets through direct assignment / outright purchase of pool of
assets, representing loans to priority sectors except ‘others’
c. Inter Bank Participation Certificate (IBPC) purchased by banks
d. Priority Sector Lending Certificates bought by banks
e. Loans to MFIs for on lending

RBI also monitors the flow of credit to PS on a quarterly basis through reporting
mechanism by Banks.

In case of Non – achievement of PS Targets, the shortfall to be contributed to Rural

Infrastructure Development Fund (RIDF)

Common guidelines for compliance in the PSL accounts is stipulated by RBI.

Targets and Sub-Targets for Priority Sector Lending in India

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

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

Domestic
commercial
Foreign
banks and
banks with Regional Rural Small Finance
Categories Foreign banks
less than 20 Banks (RRBs) Banks (SFBs)
with 20
branches
branches and
above

75% of ANBC or
CEOBE,
40% of ANBC
whichever is
or CEOBE,
higher.
whichever is
However,
higher; out of
lending to
which 32%
medium
40% of ANBC can be in the 75% of ANBC or
Total enterprises,
or CEOBE, form of CEOBE,
Priority social
whichever is lending to whichever is
Sector infrastructure
higher. exports and higher.
and renewable
not less than
energy shall be
8% can be to
reckoned for
any other
priority sector
priority
achievement
sector.
only upto 15%
of ANBC.

18% of ANBC 18% of ANBC or 18% of ANBC or

or CEOBE CEOBE CEOBE
whichever is whichever is whichever is
higher; out of higher; out of higher; out of
Not
Agriculture which 10%# is which 10%# is which 10%# is
applicable
prescribed for prescribed for prescribed for
Small and Small and Small and
Marginal Marginal Marginal
farmers. farmers. farmers.

7.5% of ANBC 7.5% of ANBC 7.5% of ANBC or

Micro or CEOBE Not or CEOBE CEOBE
Enterprises whichever is Applicable whichever is whichever is
higher. higher. higher.

12%# of ANBC 15% of ANBC or 12%# of ANBC or

Advances
or CEOBE, Not CEOBE, CEOBE,
to Weaker
whichever is Applicable whichever is whichever is
Sections
higher. higher. higher.

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

# Revised targets for agriculture and Small and Marginal Farmers will be implemented in
a phased manner.

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.

2.1 Description of Eligible Categories under Priority Sector

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

2.1.1 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) and proprietorship firms 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 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 (not applicable to UCBs), corporate
farmers, producer organizations/companies/partnership firms which are directly
engaged in activities mentioned up to an aggregate limit of Rs 2 Crores per
borrower entity.

· 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,

1
For details refer to RBI Master Direction – Priority Sector Lending – Targets and Classification, dated Sep 4, 2020.
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

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

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.

2.1.2 Micro, Small and Medium Enterprises (MSMEs): Micro, Small and Medium
Enterprises have been defined by GOI on the basis of a composite criteria of investment
in plant and machinery/equipment and annual turnover. The definition is applicable to
both manufacturing and service enterprises.

Table 2: Definition of MSMEs w.e.f July 1, 2020

Composite Plant Criteria: Investment in & Machinery/equipment and Annual

Turnover
For both Manufacturing and Service Enterprises

Micro Small Medium

Investment of Investment of not more Investment not more than

not more than Rs.1 crore than Rs.10 crore and Rs.50 crore and Annual
and Annual Turnover not Annual Turnover not Turnover not more than
more than Rs. 5 crore more than Rs. 50 crore Rs. 250 crore

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

· 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 and as notified by GOI.
· Service Enterprises: All bank loans to MSMEs engaged in providing or rendering
of services as defied in terms of investment in equipment under MSMED Act 2006
shall qualify under Priority Sector.
· Factoring Transactions: Factoring transactions “with recourse” by banks,
wherever assignor is MSME and Factoring transactions taking place through the
Trade Receivables Discounting System (TReDS) are eligible for classification as
priority sector loans.

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

· 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 10,000 (age limit 18-65 years and
there will not be any condition for overdraft upto Rs 2000) 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.

2.1.3 Export Credit: Pre-shipment and post shipment export credit extended by
domestic banks not exceeding 2% of ANBC or Credit equivalent amount of Off-Balance
Sheet Exposure, whichever higher, and subject to a limit of Rs 25 Crore per borrower to
units having turnover upto Rs. 100 crore. The per Borrower limit and turnover cap are
not applicable for Foreign Banks with 20 branches and above.

2.1.4 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.

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

(i) Loans to individuals up to ₹ 35 lakhs (and cost of dwelling unit upto Rs 45

lakhs) in metropolitan centres and loans up to ₹25 lakhs (and cost of the
dwelling unit is upto Rs 25 lakhs) 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.
(iv) Loans for housing projects exclusively for the purpose of construction of
houses for economically weaker sections(EWS having income upto Rs 3 lakhs),

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and low income groups (LIG having income upto Rs 5 lakhs per annum) and
total cost per unit not above Rs 10 lakhs.
(v) Bank loans to Housing Finance Companies (HFCs), for on-lending for housing
purposes, subject to a maximum of 5% of the Bank’s PSL.
(vi) Outstanding deposits with NHB on account of priority sector shortfall.

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

2.1.7 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.

2.1.8 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 to prepay
debt to non-institutional lenders.
(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.
(iv) Weaker Sections: In the above loans banks should ensure that 10 percent of
ANBC or Credit Equivalent of off Balance sheet exposure, whichever is higher,
is given to weaker section as defined in the RBI circular
(v) Investments in approved funds etc.

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

3.0 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

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

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. During 2017-18, the PSLCs trading volume increased by 270
per cent to ₹1,84,200 crores. In H1:2018-19, trading volume more than doubled from the level a year
ago.

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

(i) PSLC Agriculture

(ii) PSLC for small and marginal Farmers (PSLC SF/MF)
(iii) PSLC Micro Enterprises
(iv) 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.

4.0 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.

5.0 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 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

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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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