Priority Sector Lending (PSL)

Introduction

  • Definition: PSL refers to lending directed towards specific sectors of the economy deemed important for development and growth, including agriculture, small-scale industries, education, and housing.
  • Objective: Ensure equitable credit distribution, reduce regional disparities, and support economically weaker sections.

Key Milestones

  1. 1968: Introduced by the National Credit Council.
  2. 1972: Priority sector categories formalized by RBI.
  3. 1974: Target set at 33.33% of bank advances by 1979.
  4. 1980: Revised PSL target set at 40% by 1985.

PSL Targets

  1. Overall Target:
    • 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher.
  2. Sub-Targets:
    • Agriculture: 18% of ANBC.
      • Small & Marginal Farmers (SMFs): 10%.
    • Weaker Sections: 12%.
    • Micro Enterprises: 7.5%.

Eligible Categories under PSL

  1. Agriculture:
    • Farm credit, agriculture infrastructure, and ancillary activities.
    • Includes loans for renewable energy and solar agriculture projects.
  2. Micro, Small, and Medium Enterprises (MSMEs):
    • Loans for manufacturing and services.
    • Factoring services for MSMEs.
  3. Export Credit:
    • Credit for export-oriented units.
  4. Education:
    • Loans for studies in India and abroad.
  5. Housing:
    • Loans for affordable housing and slum rehabilitation.
  6. Social Infrastructure:
    • Loans for schools, hospitals, and sanitation projects.
  7. Renewable Energy:
    • Loans for solar panels, windmills, and biomass-based projects.
  8. Others:
    • Includes loans to distressed persons, women SHGs, and overdrafts under PMJDY.

Adjustments for Regional Disparities

  • High-Credit Districts:
    • Lower weightage (90%) for incremental PSL.
  • Low-Credit Districts:
    • Higher weightage (125%) to incentivize lending.

Computation of ANBC

  1. Net Bank Credit (NBC) = Bank Credit – Rediscounted Bills.
  2. Add eligible funds deposited with NABARD, NHB, SIDBI, and MUDRA.
  3. Deduct exemptions for infrastructure and affordable housing bonds.

Implementation Challenges

  1. Credit Misallocation:
    • Often skewed towards urban areas, leaving rural regions underserved.
  2. Target Non-Achievement:
    • Banks may fail to meet sub-targets for agriculture and weaker sections.
  3. Weaker Credit Culture:
    • High focus on compliance can dilute lending quality.

Significance of PSL

  • Supports economic inclusion and development.
  • Helps meet financial needs of underprivileged sections.
  • Drives investments in critical sectors like agriculture and MSMEs.

MCQ

What is the overall target for Priority Sector Lending (PSL) for domestic scheduled commercial banks?
A. 33.33% of ANBC
B. 40% of ANBC
C. 18% of ANBC
D. 25% of ANBC

Answer: B

Who introduced the concept of PSL in India?
A. Ministry of Finance
B. Reserve Bank of India
C. National Credit Council
D. NABARD

Answer: C

What is the target for agricultural credit under PSL?
A. 40% of ANBC
B. 18% of ANBC
C. 12% of ANBC
D. 33% of ANBC

Answer: B

What percentage of PSL is allocated to Small and Marginal Farmers (SMFs)?
A. 8%
B. 10%
C. 7.5%
D. 5%

Answer: B

What is the sub-target for micro enterprises under PSL?
A. 10% of ANBC
B. 7.5% of ANBC
C. 5% of ANBC
D. 15% of ANBC

Answer: B

How much credit must banks allocate to weaker sections under PSL?
A. 10%
B. 12%
C. 15%
D. 8%

Answer: B

Which of the following is NOT a category under PSL?
A. Agriculture
B. MSMEs
C. Large Corporate Loans
D. Renewable Energy

Answer: C

Loans for education fall under which PSL category?
A. Social Infrastructure
B. Agriculture
C. Others
D. Education

Answer: D

Which of these is included under the Agriculture category in PSL?
A. Loans for urban housing development
B. Loans for solar pumps on farmland
C. Loans for IT startups
D. Loans for exporting manufactured goods

Answer: B

What is the weightage assigned to incremental PSL in low-credit districts?
A. 90%
B. 125%
C. 100%
D. 110%

Answer: B

How is Adjusted Net Bank Credit (ANBC) calculated for PSL?
A. Bank Credit + RIDF Deposits
B. Net Bank Credit – Rediscounted Bills
C. Net Bank Credit + Adjustments for PSL targets
D. Net Bank Credit – Infrastructure Bonds

Answer: C

Which of the following is an eligible PSL category for renewable energy?
A. Loans for biomass power projects
B. Loans for urban transportation systems
C. Loans for rural bridges
D. Loans for industrial parks

A. Loans for biomass power projects

Which statement is TRUE about PSL?
A. It is mandatory for foreign banks with less than 20 branches.
B. It promotes financial inclusion.
C. It applies only to private sector banks.
D. PSL targets are limited to rural areas.

Answer: B

What happens if a bank fails to meet PSL targets?
A. Penalties are imposed by RBI.
B. Funds are deposited with NABARD or RIDF.
C. Loans are transferred to non-priority sectors.
D. The targets are waived off.

Answer: B

Why was PSL introduced?
A. To boost industrial exports.
B. To ensure equitable credit flow to key sectors.
C. To increase foreign investments.

Answer: B