written by | December 23, 2022

All About Priority Sector Lending: History, Needs and Importance

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Table of Content


Did you know?

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.

Also Read: Medical Equipment Loan - How To Apply, Features, Eligibility, Interest Rates

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. 

Also Read: What Is Unsecured Machinery Loan & How To Get It - Complete Procedure

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. 

Also Read: Loan For Restaurant In India - How To Apply, Eligibility, Benefits, Type of Loans

Conclusion

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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FAQs

Q: Which businesses are characterised as Micro, Small, and Medium-Sized Businesses?

Ans:

According to the following criteria, a company will be labelled as a micro, small, or medium enterprise:

  • A micro business is a business with a maximum investment in plant, machinery, or equipment of ₹1 crore and a maximum annual revenue of ₹5 crore.
  • A small business is defined as one where the investment in plant, machinery, or equipment is at the most ₹10 crores and the turnover does not exceed ₹50 crore.
  • A medium business, is defined as one where the total investment for business (plant, machinery, or equipment) is ₹50 crore and the turnover is at most ₹250 crores.

Q: What is the Target loan for Renewable energy?

Ans:

Priority Sector classification is available for bank loans up to a maximum of ₹30 crore made to borrowers for projects like solar power generation, biomass power generation, wind power generation, micro-hydel plants, and non-conventional energy-based public utilities, such as street lighting systems and remote village electrification, among others. All these are covered under renewable energy.

The maximum loan amount for individual families will be ₹10 lakh per borrower.

Q: What is the most crucial objective of priority sector lending?

Ans:

From a public policy perspective, the most crucial objective of directed lending is that it encourages social fairness and makes it easier to generate investment and employment in underdeveloped areas and vulnerable population groups.

Q: What are the new additions to priority sector lending?

Ans:

Priority Sector Lending (PSL) sectors recently added Bank loans for new businesses up to ₹50 crores. Loans for the construction of compressed biogas plants and loans for installing solar power plants for the solarisation of agriculture pumps connected to the grid.

Q: Who is considered as small and marginal farmers?

Ans:

Farmers with land up to one hectare are considered marginal farmers, and those with land from one to two hectares are considered small farmers.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.