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Priority Sector Lending (PSL)

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Priority Sector Lending (PSL):


Context:

The Reserve Bank of India has assigned priority sector lending (PSL) status to India’s startup sector.

 Significance of the move:

RBI opening up more funds for lending to startups is a very positive step. Startups have not had easy access to debt, stymied by traditional lender metrics of creditworthiness. This is a huge booster as sufficient funding and user adoption are two primary challenges for Indian entrepreneurs.

Besides, Startups have mostly relied on expensive venture debt. This move will help startups free up their equity and raise low cost debt.

What is Priority Sector Lending?

It means those sectors which 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. The banks are mandated to encourage the growth of such sectors with adequate and timely credit.

RBI guidelines for PSL for scheduled commercial banks:

40% of the total net bank credit should go to a priority sector advances.

  1. 10% of the priority sector advances or 10% of the total net bank credit, whichever is higher should go to weaker section.
  2. 18% of the total net bank credit should go to agricultural advances. Within the 18 percent target for agriculture, a target of 8 per cent of Adjusted Net Bank Credit (ANBC) or Credit  Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers, to be achieved in a phased manner.
  3. 5 of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher should go to Micro enterprises.

Priority Sector includes the following categories:

  1. Agriculture
  2. Micro, Small and Medium Enterprises (MSME)
  3. Export Credit
  4. Education
  5. Housing
  6. Social Infrastructure
  7. Renewable Energy
  8. Others

Priority Sector Lending Certificates (PSLCs):

Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall. This also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector.

InstaLinks:

Prelims Link:

  1. What are PSLCs? Who issues them?
  2. Priority sector includes? Latest additions.
  3. What is Adjusted Net Bank Credit (ANBC)?
  4. RBI guidelines on PSL.

Mains Link:

What are the objectives of Priority Sector Lending (PSL)? Recently, RBI permitted the issue and trading of PSL certificates. Discuss the significance of this initiative for PSL.

Sources: pib.