Context:
The RBI recently revised its priority sector guidelines to encourage banks to provide small loans in economically disadvantaged districts with low average loan sizes.
Relevance:
GS III: Indian Economy
About Priority Sector Lending (PSL):
- Overview:
- PSL is a lending mandate overseen by the RBI, requiring banks to allocate a specific portion of their loans to sectors crucial for development or those facing challenges in obtaining loans.
- The RBI regularly updates the eligible sectors for priority sector lending and adjusts loan limits.
- Institutions required to provide these loans are identified through regulations.
- Priority Sectors:
- Agriculture
- Micro, Small, and Medium Enterprises (MSMEs)
- Export Credit
- Education
- Housing
- Social Infrastructure
- Renewable Energy
- Others
- Targets Under PSL:
- Domestic SCBs and foreign banks with 20+ branches: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher.
- Foreign banks with fewer than 20 branches: 40% of ANBC or CEOBE, with up to 32% for exports and a minimum of 8% for any other priority sector.
- Regional Rural Banks and Small Finance Banks: 75% of ANBC or CEOBE, whichever is higher.
- Primary (Urban) Co-operative Banks (UCBs): 40% of ANBC or CEOBE, rising to 75% from FY2025-26.
- Meeting PSL Obligations:
- Banks can meet PSL targets by extending loans, providing credit facilities, and offering financial products to priority sectors.
- They can also invest in eligible instruments, such as bonds issued by entities involved in priority sector activities.
- If targets are not met, banks must deposit the shortfall into the Rural Infrastructure Development Fund (RIDF) with NABARD or other designated funds.
- Priority Sector Lending Certificates (PSLCs):
- PSLCs are certificates issued against priority sector loans, allowing banks to meet their targets by purchasing these instruments.
- PSLCs help banks guard against shortfalls and encourage surplus lending to priority sectors.
- Revised RBI Guidelines:
- New norms discourage lending in districts with high average loan sizes.
- From FY25, more weight (125%) will be given to new priority sector loans in districts with low loan availability (less than Rs 9,000 per person).
- In districts with high loan availability (more than Rs 42,000 per person), loans will have a weight of 90%.
- All other districts will maintain the current importance level of 100%, except for outlier districts with low credit availability or high loan sizes.
-Source: The Hindu
