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The origins of Priority Lending roots back to 1966 when Morarji Desai felt the need for agriculture sector growth.
What is Priority Sector Lending?
The objective behind "Priority Sector Lending" was to focus bank lending on certain predetermined economic sectors and activities. One idea that serves as the cornerstone of the priority sector lending ideology is that banks are seen as the drivers of economic growth. By regulating them, the entire economy can be given a paradigm change. Activities given national importance and development priority are called "priority sectors." These mainly consist of small businesses, agriculture, etc.
What is PSL Scheme?
Priority Sector Lending (PSL) is the term used to describe a provision made by the Reserve Bank of India (RBI). At its meeting on July 19, 2009, the RBI announced that it will playing an active role in one of the most effective ways of supporting growth in the economy. It came up with a new scheme called as Priority Sector Lending (PSL) Scheme. The objective of this scheme is to channelize funds for specific sectors like agriculture, housing and education etc.
Prioritization of sectors lends to the development of poorer regions, sectors that are considered valuable on their own, but also as a catalyst for economic growth. For example, if a region suffers from drought or is otherwise economically depressed, it will be necessary to break through the problems and give priority to the economic activities that can be effective in combating this problem.
What is the money lending limit for banks under PSL Scheme
The Reserve Bank of India (RBI) had advised the banks to give priority to lending to weaker sections by setting aside 40% of the total net bank credit towards priority sectors' advances. The RBI has also slashed down the interest rate on such loans from 3.5% last year to 3%.
Objective of PSL Scheme
The primary objective of the plan is to channel funds to the priority sectors, which include small and medium enterprises (SMEs), farmers and fishermen. The plan called "Public Sector Liquidation Certificates" (PSLC) works in a similar way as money market securities – banks issue these certificates when they need cash. Surplus banks may be incentivized in this process, while those facing shortage of money will be able to find a source of funds easily.
Priority Sector Lending in India
The argument has further been made that these industries and pursuits were neglected to qualify for bank credit. Still, to make credit more accessible, these neglected ones are given precedence. The Reserve Bank of India, also known as the Apex Bank of the nation and the regulatory agency for the Indian banking industry, periodically gives instructions, recommendations, and directives to Indian banks for lending to priority sectors.
Priority Sector Lending New Guidelines
While there have been pleas to include new areas, like infrastructure, within the ambit of the priority sector, there is concern that doing so will blur the definition of the priority sector and cause the focus to shift away from the weaker sectors of the economy and society. The scope and extent of the PSL have undergone a significant change in the post-reform period, with several new areas and sectors being brought under its purview.
Priority sectors, hence, are those economic sectors that are creditworthy and capable of boosting the country's gross domestic product but are constrained by a shortage of funding on fair conditions. In other words, the Priority sector, also known as directed lending, includes all of the endeavours that have been given national significance and development priority. As a result, adopting the priority sector idea for bank lending represents an effort to coordinate each bank's lending activities with the country's priorities.
Which Weaker Sections can Priority Sector Lending in India Help?
1. Small-scale and marginal farmers in agriculture were the main focus.
2. It includes small businesses, rural businesses, and artisans whose personal credit limits are limited to ₹1 lakh.
3. Programs sponsored by the government and those developed for the Scheduled Castes and Scheduled Tribes.
4. The Beneficiaries of the Differential Rates of Interest Programme.
5. noninstitutional lenders hold SHGs, or self-help groups The debt of struggling farmers.
6. Nonfarmers needing loans to repay their debt to non-institutional lenders need loans for a maximum of ₹1 lakh each.
7. Women and others with disabilities can receive up to ₹1 lakh.
8. Minority communities may occasionally receive notice from the Indian government.
9. 2015 saw the addition of the renewable energy sector to the list of priority sectors for loans.
Targets for Lending for Various Sectors
Following are some of the listed targets required for lending of various sectors:
- Advances in a priority sector should receive 40% of all net bank credit.
- The listed weaker sector should receive 10% of net bank credit overall or 10% of loans to priority sectors, whichever is higher.
- Agricultural advances should receive 18% of the total net bank credit. For small and marginal farmers, a target of 8% of adjusted net bank credit (ANBC) or credit equivalent amount to off-balance sheet exposure, whichever is higher, is mandated within the 18% target for agriculture. This aim is to be attained gradually.
- The requirement to reserve 40% of their Adjusted Net Bank Credit (ANDC) for lending to specific sectors applies to all scheduled commercial and international banks with a significant presence in India.
- Cooperative banks, small financing banks, and regional rural banks must devote 75% of ANDC to PSL.
Priority sector lending has made it possible for individuals to access institutional credit options that would otherwise be impossible without exploiting non-institutional finance sources that farmers and share crop growers typically turn to as a last resort. Even after continuous additions to the list, the agriculture sector and small-scale and marginal industries continue to be the focus of priority sector lending.
The other lessons highlight the reality that, contrary to popular belief, other institutional and regulatory considerations are just as crucial to the development of priority sectors as finance in limiting their growth. It is advised to exercise caution when pursuing economic development through "directed lending," as these initiatives may promote growth in the beneficiary industries. Still, the costs they impose on the banking industry and the economy may outweigh such growth's advantages.
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