What are Priority Sector Advances?
Priority Sector Advances refer to the loans that banks are required to provide to certain specific sectors of the economy. The RBI has identified these sectors as important for the country’s development and mandates that banks must give a specific portion of their total loans to them.
- Simple Meaning: It is a reservation system for bank loans. It ensures that crucial but sometimes neglected sectors get adequate and timely credit.
- Main Goal: To promote financial inclusion and support the growth of important sectors like agriculture and small industries.
Categories of the Priority Sector
The RBI has defined several categories that fall under the Priority Sector. The most important ones are:
- Agriculture: Includes farm credit, and loans for agricultural infrastructure.
- Micro, Small and Medium Enterprises (MSMEs): Loans to small businesses as per the government’s definition.
- Export Credit: Loans given to exporters to help them sell goods abroad.
- Education: Loans for educational purposes, including vocational courses.
- Housing: Home loans (subject to certain limits).
- Social Infrastructure: Loans for building schools, healthcare facilities, etc.
- Renewable Energy: Loans for projects like solar power and windmills.
- Weaker Sections: Loans to specific disadvantaged groups (like small and marginal farmers, artisans, SCs/STs, and beneficiaries of government schemes).
Priority Sector Lending (PSL) Targets
This is the most critical part for your exam. You must remember these percentages. The targets are calculated as a percentage of a bank’s Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher.
For all Scheduled Commercial Banks and Foreign Banks (with 20 branches and above)
| Category | Target (% of ANBC) |
| Total Priority Sector | 40% |
| Agriculture (Sub-target) | 18% |
| Small and Marginal Farmers (Sub-target within Agriculture) | 10% |
| Micro Enterprises (Sub-target within MSME) | 7.5% |
| Weaker Sections (Sub-target) | 12% |
For Regional Rural Banks (RRBs)
| Category | Target (% of ANBC) |
| Total Priority Sector | 75% |
| Small and Marginal Farmers | 10% |
| Micro Enterprises | 7.5% |
| Weaker Sections | 15% |
For Small Finance Banks (SFBs)
| Category | Target (% of ANBC) |
| Total Priority Sector | 75% |
| Small and Marginal Farmers | 10% |
| Micro Enterprises | 7.5% |
| Weaker Sections | 12% |
Summary
Priority Sector lending is an RBI directive that compels banks to lend a certain portion of their funds to specific, crucial sectors of the economy. The goal is to ensure that these sectors, which are vital for national development, are not starved of credit. The overall target for commercial banks is 40% of their lending, while for RRBs and Small Finance Banks, it is a higher 75%. Within these overall targets, there are important sub-targets for sectors like Agriculture, Small and Marginal Farmers, Micro Enterprises, and Weaker Sections, which banks must also achieve.
Quick Revision Points
- Main Goal: To provide credit to important and neglected sectors.
- Overall Target (Commercial Banks): 40% of ANBC.
- Overall Target (RRBs & SFBs): 75% of ANBC.
- Agriculture Sub-Target: 18%.
- Small & Marginal Farmers Sub-Target: 10%.
- Micro Enterprises Sub-Target: 7.5%.
- Weaker Sections Sub-Target: 12% (for Commercial Banks & SFBs) and 15% (for RRBs).
- Penalty: If a bank fails to meet its targets, it has to deposit the shortfall amount with funds like NABARD’s RIDF.