Priority Sector Lending, Meaning, history, targets, revision

Table of Contents

Priority Sector Lending: Priority sector lending is a crucial component of the banking system in India, holding significant relevance in the UPSC GS Paper 3 Syllabus, as well as various state PCS examinations and regulatory body examinations such as RBI and NABARD. Whether you are preparing for any of these competitive exams, understanding priority sector lending is essential. This article aims to highlight the key aspects of PSL that are important for various examinations, providing you with valuable insights and knowledge.

What is Priority sector lending?

Priority Sectors are those 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.
So, under priority sector lending, the banks are mandated to encourage the growth of such sectors with adequate and timely credit.

Priority sector lending in India: History

The origins of priority sector lending can be traced back to 1966 when Morarji Desai saw a need for increasing credit to agriculture and small industries.
However, the definition of the priority sector was formalized based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972.
In 1974, the commercial banks were given a target of 33.33% of their ANBC, which was increased to 404 of ANBC on the recommendations of Dr. K.S. Krishnaswamy’s committee.
After nationalization of banks, the priority sector formulation also allowed Indira Gandhi, the then-prime minister of India, to satisfy important political lobbies.
The priority sector definition grew over time and was not just limited to important lobby groups, but extended to cover important neglected sectors of the economy.
However, despite the tweaks, till today, the classification retains a heavy focus on agriculture and small industries (defined as micro, small, and medium enterprises or MSME).

Priority sector lending categories

Priority sector lending by banks in India constitutes lending to

Agriculture
Micro, Small and Medium Enterprises
Export Credit
Education
Housing
Social Infrastructure
Renewable Energy
Others

Priority Sector Lending Targets

The targets and sub-targets set under priority sector lending for all scheduled commercial banks operating in India are furnished below:

Categories	Domestic scheduled commercial banks and foreign banks with 20 branches and above	Foreign banks with less than 20 branches	Regional Rural Banks	Small Finance Banks
Total Priority Sector	40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.	40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher; out of which up to 32% can be in the form of lending to Exports and not less than 8% can be to any other priority sector	75 percent of ANBC. However, lending to Medium Enterprises, Social Infrastructure, and Renewable Energy shall be reckoned for priority sector achievement only up to 15 percent of ANBC.	75 percent of ANBC.
Agriculture	18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. Within the 18 percent target for agriculture, a target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher is prescribed for Small and Marginal Farmers.	Not applicable	18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.	18 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
Micro Enterprises	7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher	Not applicable	7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher	7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher
Advances to Weaker Sections	12 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher	Not applicable	15 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher	12 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher

PSL targets for UCB, Urban Co-operative Banks (UCBs)

Total Priority Sector – 40 percent of ANBC or CEOBE, whichever is higher, which shall stand increased to 75 percent of ANBC, with effect from March 31, 2024
Micro Enterprises – 7.5 percent of ANBC.
Advances to Weaker Sections -12 percent of ANBC.

Education

Loans to individuals for educational purposes, including vocational courses, not exceeding Rs 20 lakh will be considered eligible for priority sector classification.

Housing

Loans to individuals up to Rs 35 lakh in metropolitan centers (with a population of ten lacks and above) and loans 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 and at other centers should not exceed Rs 45 lakh and Rs 30 lakh respectively.

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.

Renewable Energy

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 Rs 10 lakh per borrower.

Revised Priority Sector Lending Guidelines

RBI has revised the PSL categories and credit limit in 2020 by taking into consideration the recommendations made by the UK Sinha-led expert committee on MSMEs.

New categories

Bank finance to start-ups up to Rs. 50 crore,
loans to farmers for the installation of solar power plants for the solarisation of grid-connected agriculture pumps, and
loans for setting up Compressed BioGas plants.

Increased Credit limit

For health infrastructure, the limit has been increased to 10 crores, while for renewable energy, the limit has been increased to 30 crores.
Banks can also give loans up to 5 crores for setting up schools, drinking water, and sanitation facilities.

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