Definition, role and sectors of Priority Sector Lending (PSL)

Definition: The priority sector is defined as the sectors that the Government of India and Reserve Bank of India consider as important for the development of the basic needs of the country and are to be given priority over other sectors while lending. The role of lenders is assigned by the Reserve Bank of India to the banks for providing a specified portion of the bank lending to selected sectors like agriculture and allied activities, micro- and small enterprises, education, housing for the poor, and other low-income groups and weaker sections, etc.

RBI revises the guidelines for Priority Sector Lending vide its circular dated Sept 4, 2020. In the revised PSL Guidelines, the Reserve Bank of India doubled credit limits for certain categories and included fresh categories eligible for finance under the priority sector. These include loans to farmers for the installation of solar power plants; loans for the establishment of Compressed Bio Gas (CBG) plants; and bank finance to start-ups. Revised PSL guidelines will enable better credit penetration to credit deficient areas; increase lending to small and marginal farmers and weaker sections; and boost credit to renewable energy, and health infrastructure, it said.

The total Priority Sector lending of a domestic commercial bank should be 40 per cent (target for foreign banks 32%) of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Banks should comply with the following common guidelines for all categories of advances under the priority sector.

Agriculture:

The activities covered under Agriculture are classified under three sub-categories viz. Farm Credit, Agriculture infrastructure, and Ancillary activities. The total direct and indirect agriculture advances target fixed by RBI for classification of priority sector lending is 18 percent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE), whichever is higher. Of this, indirect lending over 4.5% of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, will not be reckoned for computing performance of 18 per cent target. However, all agricultural advances under the categories ‘direct’ and ‘indirect’ will be reckoned in computing performance under the overall priority sector target of 40 per cent of ANBC or CEOBE, whichever is higher. Within the 18 percent target for agriculture, a target of 10 percent by 2023-24 (which is currently 8%) of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher to be reached in a phased manner.

As per the RBI circular dated September 4, 2020, the targets prescribed for “small and marginal farmers” and “weaker sections” are being increased in a phased manner. The revised targets for SMF will be implemented in a phased manner as indicated below.

Financial Year        Small and Marginal Farmers target    

2020-21                                     8%                                           

2021-22                                    9%                                            

2022-23                                    9.5%                                         

2023-24                                   10%                                           

(The applicable target for lending to the non-corporate farmers for FY 2020-21 will be 12.14% of ANBC or CEOBE whichever is higher).

Advances to a weaker section:

The revised targets for weaker sections will be implemented in a phased manner as indicated below

Financial Year                Weaker Sections target

2020-21                                       10%

2021-22                                       11%

2022-23                                       11.5%

2023-24                                       12%

Housing:

Bank loans to the Housing sector as per the limits prescribed below are eligible for priority sector classification:

Loans to individuals up to Rs 35 lakh in metropolitan centers (with a population of ten lakh and above) and up to Rs.25 lakh in other centers for purchase/construction of a dwelling unit per family provided the overall cost of the dwelling unit in the metropolitan center does not exceed Rs45 lakh and at other centers does not exceed Rs30 lakh. However, existing individual housing loans of UCBs presently classified under PSL will continue as PSL till maturity or repayment. Housing loans to banks’ own employees will not be eligible for classification under the priority sector.

Repairing dwelling units:

In the revised guidelines the limits for repairing damaged dwelling units doubled to be classified as PSL. The loans released up to Rs10 lakh in metropolitan centers and up to Rs 6 lakh in other centers for repairing damaged dwelling units can be classified as PSL subject to meeting the requirements of the overall cost of the dwelling unit.

Education:

Loans to individuals for educational purposes, not exceeding Rs. 20 lakh, including vocational courses, will be considered eligible for priority sector classification. Loans currently classified as priority sectors will continue till maturity.

Renewable Energy:

Loan limits for renewable energy have been doubled. Bank loans up to a limit of Rs.30 crore to borrowers for purposes like solar-based power generators, biomass-based power generators, windmills, micro-hydel plants, and for non-conventional energy-based public utilities, viz., street lighting systems and remote village electrification, etc., will be eligible for Priority Sector classification. For individual households, the loan limit will be Rs10 lakh per borrower.

Loans to farmers for installation of solar power plants for solarisation of grid-connected agriculture pumps and loans for setting up Compressed Bio Gas (CBG) plants have been included as fresh categories eligible for finance under the priority sector. Individuals could also qualify for priority sector loans for the purchase of solar-based power generators for their own use. However, the maximum amount of loan that can be sanctioned under the scheme is Rs 10 lakh per borrower subject to complying with guidelines issued by RBI.

Social Infrastructure:

Bank loans up to a limit of Rs 5 crore per borrower for setting up schools, drinking water facilities, and sanitation facilities including construction/ refurbishment of household toilets and water improvements at the household level, etc., and loans up to a limit of Rs 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centers are eligible for priority sector classification. In the case of UCBs, the above limits are applicable only in centers having a population of less than one lakh.

Start-ups engaged in activities other than Agriculture or MSME:

Loan up to Rs 50 crore to Start-ups, as per the definition of the Ministry of Commerce and Industry, Govt. of India that are engaged in activities other than Agriculture or MSME is eligible for finance under the priority sector.

To address regional disparities in the flow of priority sector credit at the district level, it has been decided to rank districts based on per capita credit flow to the priority sector and build an incentive framework for districts with a comparatively lower flow of credit and a dis-incentive framework for districts with a comparatively higher flow of priority sector credit. Accordingly, from FY 2021-22, a higher weight (125%) would be assigned to the incremental priority sector credit in the identified districts where the credit flow is comparatively lower (per capita PSL less than Rs6000), and lower weight (90%) would be assigned for incremental priority sector credit in the identified districts where the credit flow is comparatively higher (per capita PSL greater than Rs 25,000), the circular said.

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