UNIT 4

Priority Sector Financing and

Government Initiatives
What is priority sector lending?
Priority Sector refers to those sectors of the economy
which may not get timely and adequate credit.
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.
The sectors may be agriculture and allied activities, micro
and small enterprises, poor people for housing, students
for education and other low income groups and weaker
sections.
This is essentially meant for an all round development of
the economy as opposed to focusing only on the financial
sector.
What is priority sector lending?
As per the RBI circular released in 2016, there
are eight broad categories of the Priority Sector
Lending.
They are: (1) Agriculture (2) Micro, Small and Medium
Enterprises (3) Export Credit (4) Education (5)
Housing (6) Social Infrastructure (7) Renewable
Energy (8) Others.
The others category includes personal loans to weaker
section, loans to distressed persons, loans to state
sponsored organisations for SC/ST.
How is RBI revamping PSL?
The current banking and economic situation demands a fresh
round of thinking regarding priority sector lending (PSL)
guidelines.
Reserve Bank of India (RBI) initiated two significant steps.
First, it revamped PSL norms by including some new sectors
such as social infrastructure, renewable energy and medium
enterprises among others.
Second was the introduction of the scheme of priority sector
lending certificates (PSLC) to facilitate the achievement
of PSL targets by banks.
This is to incentivise banks having surplus in their priority
sector lending to sell this surplus to peers that are falling short.
What is priority sector lending?
What is ANBC– Adjusted Net Bank Credit- In simple
language and as of now just understand it as the total
loans given by the bank. 
Target for Priority Sector Lending
The RBI has set target for banks for lending to priority
sector in terms of percentage of ANBC. Also for some
category like agriculture, MSME etc. RBI has set sub-
target for lending. The same is given in the table
below. The table is applicable for Domestic
scheduled commercial banks and foreign banks
with 20 branches and above.
Category wise Lending Percentage
Total Priority Sector
40% of ANBC
Agriculture
18% of ANBC
Micro Enterprises
7.5% of ANBC
Advances to Weaker Sections
10% of ANBC
Note: This is only the minimum level of lending
prescribed by RBI. Banks can lend even more than
this. 
Details of Priority Sectors
Agriculture– It will include (i) Farm Credit  (ii)
Agriculture Infrastructure and (iii) Ancillary Activities.
Micro, Small and Medium Enterprises
Manufacturing Sector Enterprises Investment in
plant and machinery
Micro Enterprises Rs 25 Lakhs
Small EnterprisesRs 25 lakhs to Rs 5 Crore
Medium EnterprisesRs 5 Crore to Rs 10 Crore
Service SectorEnterprisesInvestment in equipment
Micro Enterprises Rs 10 lakhs
Small Enterprises Rs 10 lakhs to Rs 2 Crore
Medium Enterprises Rs 2 Crore to Rs 5 Crore
 Details of Priority Sectors
Education– Loans up to Rs 10 lakhs for studies in India and
Rs. 20 lakhs for studies abroad.
Housing – Eligible loan amount is mentioned below:
Place Maximum Eligible Cost of house
Loan should not exceed

Metropolitan 35 Lakhs 45 Lakhs

Others 25 Lakhs 30 Lakhs

Maximum loan for repair of house in metropolitan area- Rs 5

lakhs
Maximum loan for repair of house in other centers- Rs 2 lakhs
 Details of Priority Sectors
Social infrastructure– Bank loans up to a limit of Rs 5
Crore per borrower for building social infrastructure for
activities namely schools, health care facilities, drinking
water facilities and sanitation facilities including
construction/ refurbishment of household toilets and
household level water improvements in Tier II to Tier VI
centres.
Renewable Energy– If a person or organisation wants
loan 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 then the limit for same is:
For organisations- Rs 15 Crore
For individual- Rs 10 Lakh
Details of Priority Sectors
Others– The following categories come under others
as defined by RBI
Category Maximum Loan Restrictions
Individual Rs. 50,000
Maximum Annual Income
in rural area = Rs 1 lakh
in Urban area= Rs 1.6 lakh

Loans to distressed persons Rs. 1 Lakh other than farmers

Priority sector loans to Weaker Section

Priority sector loans to the following borrowers will be

considered under Weaker Sections category:-
No Category
1Priority
Small and loans
sector Marginal Farmers
to the following borrowers will be considered under
2Weaker Sections
Artisans, category
village and cottage industries where individual credit limits do not
exceed ₹0.1 million
3 Beneficiaries under Government Sponsored Schemes such as National Rural
Livelihood Mission (NRLM), National Urban Livelihood Mission (NULM) and
Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)

4 Scheduled Castes and Scheduled Tribes

5 Beneficiaries of Differential Rate of Interest (DRI) scheme
6 Self Help Groups
7 Distressed farmers indebted to non-institutional lenders
8 Distressed persons other than farmers, with loan amount not exceeding ₹0.1
million per borrower to prepay their debt to non-institutional lenders

9 Individual women beneficiaries up to ₹0.1 million per borrower

10 Persons with disabilities
11 Overdraft limit to PMJDY account holder up to ₹ 10,000/- with age limit of 18-65
years.
12 Minority communities as may be notified by Government of India from time to
time.
Priority Sector Lending Targets /Sub-targets for
Regional Rural Banks
RRBs will have a target of 75 per cent of their outstanding advances for priority
sector lending and sub-sector targets as indicated in table below.

Categories Targets
Total Priority Sector 75 per cent of total outstanding

Agriculture 18 per cent of total outstanding

Small and Marginal Farmers 8 percent of total outstanding

Micro Enterprises 7.5 per cent of total outstanding

Weaker Sections 15 per cent of total outstanding

 Government Initiatives:

Poverty Alleviation Programmes

1. Integrated Rural Development Programme
It was initiated on October 2, 1980. The programme
has been designed in a manner that the benefits flow
to the poorest as the first priority. The small farmers
get a subsidy of 25% of the capital cost while the
marginal farmers share is 33.3%. The Landless
labourers and rural artisans are entitled to a 50%
subsidy for acquisition of assets.
The programme had set out to generate income of Rs.
2000 per family. However Mid-term appraisal of the
Ninth Plan revealed that the average investment per
family remained too inadequate to generate the target
income per family.
1. Integrated Rural Development Programme
The success of the programme would have been much
higher but for the fact that selection of families is not
always guided by economic and business considerations.
Where the selected family does not have the requisite
aptitude and ability to manage, the gains have not been
commensurate with the subsidy made available under the
Plan.
Presently all families having an annual income below Rs.
11,000 have been made eligible for assistance under IRDP.
By the end of the Eighth Plan period, over 89 lakh families
had been assisted. 50% families of the beneficiaries were
SC/ST. However the target of assisting 40% women could
not be achieved.
2. National Rural Employment Programme
It is the new name for the Original Food for Work Programme.
It is centrally sponsored with the Central government
providing 50% assistance. Under the Programme the target is
to create additional employment of the order 300-400 million
men days annually. The beneficiaries are to be the unemployed
and the under-employed persons.
A critical assessment of the performance under the Plan shows
that while funds are put in the programme liberally the output
in terms of employment generation remains well below the
target. The employment provided is of short duration and the
wages paid are less than the prevailing market rates. Even the
selection of beneficiaries is not always above board.
2.National Rural Employment Programme
The most common works undertaken under the
programme are development of kutcha road within the
villages. The States are required to contribute 50% of
the total Plan expenditure out of their resources. But
what the States have been doing is that instead of
pumping new funds, the existing programmes of the
Public Works Department are shown as works under
the NREP. In some cases the funds are spent over
constructions involving high priced material
components. In such cases to the basic purpose of
utilizing locally available material and labour gets
defeated.
3.Rural Landless Employment Guarantee
Programme
It was launched in August 1983 is a supplement to the NREP. Under
the programme, the wages to landless labourers are paid partly in
money and partly in food grains. The projects under the
Programme are undertaken during the days there is not much to do
on the farms.

The idea behind the programme is that at least one member from
each landless family should be provided with 100 days of gainful
employment. The projects undertaken under the Programme
include improvement of minor irrigation facilities, reclamation of
waste land, social forestry and soil conservation. The other projects
covered under the Programme include Indira Awas Yojna and the
Million Wells Scheme. NREP and RLEGP have many overlapping
areas. It is now proposed to merge the two Programmes.
 4.Jawahar Rozgar Yojna
It is implemented through the agency of village
panchayats. The Central government provides 80%
finance and the States share is a bare 20%. Funds are
allocated to the village panchayats in proportion to the
size of population living below the poverty line.

The target is to provide 50-100 days of employment to

at least one member of every poor family within the
village with a 30% reservation for women. It was
assessed that 50% of the houses constructed under the
Jawahar Rozgar Yojna were of good quality.
 4.Jawahar Rozgar Yojna
The average cost per house came to around Rs.13, 543. This
expenditure has since been increased to Rs. 20,000 to cover
cost escalation and for improving further the quality of
construction work. Rural roads accounted for 33% of the
total expenditure. Another 9% was spent on minor
irrigation projects. Other beneficiaries include social
forestry and schools and community buildings like
Panchayat halls.

The impact of the Jawahar Rozgar Yojna in creating

additional employment has not been satisfactory. While the
target was to create 100 days of employment the achieved
target has been just 11 days. (1993-1994 evaluation).
 4.Jawahar Rozgar Yojna
These programmes have an indirect positive fall out.
With more money available for consumption in the rural
sector, there is an increase in rural consumption
expenditure. This increased expenditure also helps in
creating new demands and consequently Employment
Assurance Scheme was introduced in October 1993.

The aim of the scheme was to provide 100 days of

unskilled manual work to the rural poor. All men and
women above 18 years of age were intended to be
covered under the scheme. However, the achieved target
was only 41.3 days in a year.
Rural Housing & Urban Housing Schemes
1. Pradhan Mantri Gramin Awaas Yojana
Previously known as Indira Awas Yojna, this scheme
focuses on providing pucca houses with basic amenities
to homeless families. The objective is to build one crore
homes of 25 sqm by 2022. The government provides
financial assistance by sharing the cost of construction
with the state in the ratio of 60:40 in plain areas and 90:10
for north eastern and hilly areas. The cost for the unit
assistance of Rs 1.2 lakh is also provided to the beneficiary
belonging to households without shelter, destitute/living
on alms, manual scavengers, tribal groups and legally
released bonded labour. So far, about 28.8 lakh homes
have been constructed against a target of 1 crore by 2022.
Rural Housing & Urban Housing Schemes
2. Pradhan Mantri Awas Yojana (PMAY) (Urban)
Also called the Housing For All scheme, PMAY was
launched in 2015 and aims to deliver houses for the
homeless by 2022. While the centre is offering
assistance to all states and UTs, it will also provide
home loan interest subsidy for those buying their first
home in urban areas. Under the scheme, the
government will provide interest subsidy of three to
four per cent for a home loan amount of up to Rs 9
lakh and Rs 12 lakh. So far, over 3 lakh homes under
PMAY (urban) have been constructed against a target
of 40.6 lakh by 2022. 
 Educational Loan under PSL
Under Priority Sector Lending (PSL), the loans and
advances granted to only individuals for educational
purposes including vocational courses up to Rs.10 lac
for studies in India and Rs. 20 lac for studies abroad.