Priority Sector Lending

In the first week of September, 2020, the Reserve Bank of India has revised the Priority Sector Lending norms. As per the new guidelines, loans up to Rs. 50 Crore for startups in agriculture and MSME sector would be given under Priority Sector. This apart, the lending limit for health infrastructure has also been doubled to Rs. 10 crore.

What is Priority Sector Lending?

Priority Sector Lending means giving certain fraction of overall loans by a bank to certain vulnerable sectors as designated by RBI from time to time.

By vulnerable, we mean that these are small sectors and may not appear attractive to banks to provide them loans. For example, farmers, small businessmen, students etc. may find it very difficult to access institutional credit. To make sure that  adequate institutional credit flows into these sectors, RBI sets aside some targets for the banks, which are called Priority Sector Lending Targets.

What are different broad sectors under Priority Sector Lending?

As of now RBI has divided all legible PSL sectors into eight broad categories. These are:

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

What is history of Priority Sector Lending?

Priority Sector was defined for the first time in 1972 by Dr. K S Krishnaswamy Committee. This committee defined PSL only after the National Credit Council emphasizes that there needs to be a larger involvement of the commercial banks in the priority sector. For the first time, RBI set 33.33% share of their total loans to priority sector. Thus, priority sector lending in India is there since 1974.

What is the current total share of loans that banks need to provide to priority sector?

Currently, the different bank categories have different shares of their Adjusted Net Bank Credits (ANBC) to be given out to Priority Sector. ANBC means total loans given by the banks. For this purpose, RBI has set different targets for Domestic Commercial Banks, Foreign Banks, Regional Rural Banks and Small Finance Banks. These are as follows:

• Every Domestic Commercial Bank and Every Foreign Bank operating in India with more than 20 branches needs to provide 40% of their total loans to priority sector. Of this 40%, 18% should be given out to Agriculture; 7.5% should be given out to Micro, small and Medium Industries; while 12% of this 40% should be given out to other weaker sections.
• For the Foreign Banks having less than 20 Branches, RBI has stipulated 40% of its total loan to priority sector of which it can provide maximum 32% to export units and at least 8% to other sectors.
• For Regional Rural Banks, RBI has set a very high target for Priority Sector Lending. As per RBI norms, every RRB (regional Rural Bank) has to provide 75% of its total loans to priority sector. Of this, 18% should be for farm sector, 7.5% should be for MSMES and 15% for weaker sections.
• Similarly, the small finance banks, which were started in India to serve the weaker section only; RBI has set 75% of the total loans to be given out to priority sector.

What is covered  in farm sector under the Priority Sector Loans scheme?

RBI has divided agriculture sector into three sub-categories. These are farm credit, agriculture infrastructure and ancillary activities.

• Farm credit means loans to individual / small and marginal farmers, Self Help Groups and Joint Liability Groups for agriculture and allied activities such as dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.
• Agriculture Infrastructure included construction of various facilities such as warehouses, market yards, godowns, silos, cold storage units and chains for farm produce.
• Also projects such as Soil conservation and watershed development projects; Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and vermi composting etc. eligible.
• Ancillary Activities includes loans for marketing of farm produce, setting up agricultural clinics and agribusiness centres and also food processing units.
• RBI has now allowed Rs. 50 Crore loan for agriculture related startups in recent guidelines.

What is covered in Micro, Small and Medium Enterprises (MSMEs) sector in PSL scheme?

Any loan to MSME industries for their business purposes comes under priority sector. MSMEs have been defined by Ministry of Micro, Small and Medium Enterprises in 2006 as per investment limit in plant & machinery. The loans to MSME include such as:

• Loans to Khadi and Village Industries Sector (KVI)
• Loans to entities which provide inputs to artisans / village / cottage industries and their cooperatives
• Loans to Micro-finance Institutions, which in turn use this loan to disburse to MSME
• Loans under various schemes related to MSME scheme
• Overdraft under Pradhan Mantri Jan-dhan Yojana up to Rs. 5000.
• Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.
• It also includes export credit.

MSME sector now also includes Agriculture-startups under the PSL scheme and RBI has put a cap of Rs. 50 crore for that.

What are Education loans under Priority Sector loans?

Educational loans include loans to individuals for educational purposes including vocational courses up to Rs. 10 lakh.

What are other sectors under Priority Sector Scheme?

Some other sectors include:

• Housing such as home loans, loans to various government agencies for building cost effective houses.
• Social infrastructure such as building schools, health care facilities, drinking water facilities and sanitation facilities etc.
• Renewable Energy loans for facilities such as solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities Viz. Street lighting systems, and remote village electrification.

What are the weaker sections of society covered under PSL?

• The PSL scheme covers weaker sections of society such as:
• Small and marginal farmers. RBI defines marginal farmer as one with less than 1 hectare of land {1 hectare=11959 Yards}, and small farmers as one with 1-2 hectare of land.
• Artisans of village and cottage industries.
• Poor people who are beneficiaries of various jobs schemes of government.
• People belonging to SC and ST
• Distressed farmers indebted to non-institutional lenders as private moneylenders.
• Women
• Persons with disabilities
• Minorities

What are the new things in PSL norms recently released by RBI? (September, 2020)

The recently released guidelines have tried to augment the funding to segments including start-ups and agriculture. As per revised guidelines, Bank finance of up to ₹50 crore to start-ups, loans to farmers both for installation of solar power plants for solarisation of grid-connected agriculture pumps, and for setting up compressed biogas (CBG) plants have been included as fresh categories eligible for finance under the priority sector.