INDEX

Sl.no. Particulars Page no.

1. Introduction

2. History of priority sector Lending

3. Categories and Loans

4. Target

5. Promotion of underprivileged classes

6. Conclusion

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 INTRODUCTION

The concept of ‘Priority sector lending’ focuses on the idea of directing the lending of the banks
towards few specified sectors and activities in the economy. One belief which forms the
cornerstone behind the philosophy of priority sector lending is that banks are believed to be the
movers of economic growth and that by regulating them the whole economy can be given a
different a different shape and texture. The term ‘priority sector’ indicates those activities
which have national importance and have been assigned priority for development. These
primarily include agriculture, small industries etc. The case has further been that these sectors
and activities were neglected ones for the purpose of bank credit and therefore for the purposes
of accessibility of credit, these neglected ones are considered to be at priority for providing
credit. The Reserve Bank of India, which is the supervisory body of the banking sector in India,
also referred to as the Apex Bank of the country, has from time to time issues
instructions/guidelines/directives to the banks in India with regard to the priority sector lending.
The scope and extent of the Priority sector lending has undergone a significant change in the
post-reform period with several new areas and sectors being brought under its purview while
there has been demands to include new areas, such as infrastructure, within the ambit of priority
sector, there is an apprehension that it will dilute the definition of priority sector with the focus
on the needy sectors of the economy and weaker section of the society getting lost.
The concept of priority sector lending (PSL) was introduced mainly with the intention to ensure
that assistance from the banking system in an increasing manner is provided to those sectors of
the economy which have not received adequate support of institutional finance. The Reserve
Bank of India (RBI) identified the priority sector as:

(i) Agriculture (direct and indirect finance),

(ii) Small scale industries (SSI),
(iii) Small road and water transport operators
(iv) Small business,
(v) Professional and self-employed persons,
(vi) Education,
(vii) Housing,
(viii) Micro-credit, and

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 (ix) Weaker sections.

RBI monitors the priority sector advances made by commercial banks through periodical return
received from the banks and the performance of banks is reviewed in various ways set up under
the lead bank scheme. Since seventies, RBI and government of India have stipulated some
guidelines regarding financing in the priority sector on an increasing scale, more deployment
of credit towards backward regions, preparation and implementation of credit plans and
measures for enhancing productivity, employment and economic growth with social justice.

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 HISTORY OF PRIORITY SECTOR LENDING

The most primary sector of economy at that point in time i.e. agriculture was in need of funds
but it was not the desired avenue for the commercial banks to extend credit due to multiplicity
of factors prevalent at those times. The government initiatives such as green revolution etc.
also led to significant increase in the demand for credit by the farmers and the cooperative
societies and the State Bank of India could not manage to meet the requirements of credit due
to its increased demand. Subsequent to this background, the following incidents took place
(which have been mentioned in the chronological order) which paved way for the adoption of
the concept of ‘directed lending’ which is called ‘priority sector lending’ in India.

In July 1966, the All India Rural Credit Review Committee was set up in July 1966 to reassess
the situation of rural credit by different credit agencies and to make recommendations for
improving the flow of credit to agriculture and it recommended that the commercial banks
should play a complementary role, along with the cooperatives, in extending the rural credit.

The term ‘priority sector’ was first used in terms of policy measures when the then Deputy
Prime Minister and Minister of Finance, Sri Morarji Desai stated in Lok Sabha on December
14, 1967 that there are persistent complaints that several ‘priority sectors’ such as agriculture,
small scale industries and exports have not been receiving their due share of bank credit.

Social Control Measure over Banks- The policy of Social Control of the Banks was a major
rationale behind bringing forth the priority sector lending for the banks. Social control
demanded the banks to align their operations in line with the national objectives which were
inclined towards socialist principles. It facilitated the government to have controls over the
affairs of bank management in order to supervise that the affairs of bank also keep in
consideration the national objectives. The Banking Laws (Amendment) Act was passed in this
regard in 1968 which came into force on 1-2-1969.

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National Credit Council and its Recommendations- This body was set up in 1968 to estimate
the demand for bank credit from the different sectors of the economy and the report focused on
the need for coordination between cooperative banks and commercial banks in order to achieve
optimum utilization of resources and to replace the exploitative money lenders.

Nationalization of Banks- perhaps, it was believed or experientially found that ‘Social Control
without nationalization had no meaning’ and in 1969, the government under the leadership of
Smt. Indira Gandhi took a step which is till now considered to be the milestone in the history
of banking sector in India. The coming into effect of the Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance, fourteen major banks were nationalized in order to avoid
concentration of economic power and to ensure credit to the neglected sectors of the economy.

In 1972, the description of the priority sector was formalised on the basis of the report
submitted by the Informal Study Group on Statistics relating to advances to the priority sector
constituted by the RBI in May 1971.Initially, there was no specific target set for lending to the
priority sectors but in November 1974, the banks were advised to raise the share of these sectors
in their aggregate advances to the level of 33.3 percent by March 1979.In 1974 only, the private
banks were also advised by the RBI to reach a level of not less than one third of their total
outstanding by March 1980 at par with the public sector banks.

In 1980, on the basis of the recommendations of the Working Group on the Modalities of
priority sector lending by banks chaired by Dr. K.S. Krishnaswamy, all commercial banks were
advised to achieve the target of PSL at 40 percent of the bank advances by 1985. Not only that
but also the sub-targets were also specified for lending to agriculture and the weaker sections
within the category of priority sector.

Since then, there have been several changes in the practice of priority sector lending which
include changes in the scope of priority sector lending by inclusion of various other sectors
from time to time and also the scope of targets and sub-targets under applicable to the various
bank groups have also been modified from time to time as per the instructions of the RBI.

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 CATEGORIES AND LOANS UNDER PRIORITY SECTOR LENDING

1. AGRICULTURE

Direct finance

Finance to individual farmers (including Self Help Groups (SHGs) or Joint Liability Groups
(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on such
finance] for Agriculture and Allied Activities ;
• Short-term loans for raising crops, i.e. For crop loans. This will include traditional/non-
traditional plantations and horticulture.
• Advances upto 10 lakh against pledge/hypothecation of agricultural produce (including
warehouse receipts) for a period not exceeding 12 months, irrespective of whether the
farmers were given crop loans for raising the produce or not.
• Short-term loans under tie-up arrangements with sugar mills, agro-processing units and
agri-exporters.
• Working capital and term loans for financing production and investment requirements
for agriculture and allied activities.
• Loans to small and marginal farmers for purchase of land for agricultural purposes.
• Loans to distressed farmers indebted to non-institutional Lenders, against appropriate
collateral or group security.
• Loans granted for pre-harvest and post-harvest activities such as spraying, weeding,
harvesting, grading, sorting, processing and transporting undertaken by households or
groups/co- operatives of households.

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Indirect finance
• Loans to food and agro-based processing units with investments in plant and machinery
upto 10 crore, undertaken by other than households.
• Loans to Non-Banking Financial Companies (NBFCs) for on lending to individual
farmers.
• Credit for purchase and distribution of fertilizers, pesticides, seeds, etc.,
• Loans upto 40 lakh granted for purchase and distribution of inputs for the allied
activities such as cattle feed, poultry feed, etc.
• Finance for setting up of Agri clinics and Agri business Centers.
• Finance for hire-purchase schemes for distribution of agricultural machinery and
implements.
• Loans to farmers through Primary Agricultural Credit Societies (PACS), Farmers
Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS).
• Loans to cooperative societies of farmers for disposing of the Produce of members.
• Financing the farmers indirectly through the co-operative system (otherwise than by
subscription to bonds and debenture issued) provided a certificate from the State Co-
operative Bank/ State Cooperative Agriculture and Rural Development Bank
(SCARDB), as the case may be, is produced, certifying the end use of such loans.
• Investments by banks in special bonds issued by NABARD with the objective of
financing exclusively agriculture/allied activities.
• Loans for construction and running of storage facilities (warehouse, market yards,
godowns, and silos), including cold storage units designed to store agriculture
produce/products, irrespective of their location.
• Advances to Custom Service Units managed by individuals, institutions or
organizations who maintain a fleet of tractors, Bulldozers, well-boring equipment,
threshers, combines, etc., and undertake work for farmers on contract basis.
• Finance extended to dealers in drip irrigation/sprinkler irrigation system/agricultural
machinery, irrespective of their location, subject to the following conditions:
(a) The dealer should be dealing exclusively in such items or if dealing in other
products, should be maintaining separate and distinct records in respect of such
items.
(b) A ceiling of up to 30 lakh per dealer should be observed.
• Loans to Arthias (commission agents in rural/semi-urban areas functioning in

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 markets/mandies) for extending credit to farmers, for supply of inputs as also for buying
the output from the individual farmers/ SHGS/ JLGs.
• Fifty per cent of the credit outstanding under loans for general purposes under General
Credit Cards (GCC).
• Loans already disbursed and outstanding as on the date of this circular, toState
Electricity Boards (SEBs) and power distribution corporations/companies, emerging
out of bifurcation/ restructuring of SEBS, for reimbursing the expenditure already
incurred by them for providing low tension connection from step-down point to
individual farmers for energising their wells and for Systems Improvement Scheme
under Special Project Agriculture (SI-SPA), are eligible for classification as indirect
finance upto March 2009.

2. SMALL ENTERPRISES

Direct Finance
Direct Finance in the small enterprises sector will include credit to:

• Small (manufacturing) Enterprises: Enterprises engaged in the manufacture, processing

or preservation of goods and whose investment in plant and machinery [original cost
excluding land and building and the items specified by the Ministry of Small Scale
Industries vide its notification no. S.O. 1722 € dated October 5, 2006] does not exceed
5 crore.
• Micro (manufacturing) Enterprises: Enterprises engaged in the manufacture, processing
or preservation of goods and whose investment in plant and machinery [original cost
excluding land and building and such items as in 2.1.1] does not exceed 25 lakh,
irrespective of the location of the unit.
• Small (service) Enterprises: Enterprises engaged in providing/ rendering of industry
related services and whose investment in equipment (original cost excluding land and
building and furniture, fittings and other items not directly related to the service
rendered or as may be notified under the MSMED Act, 2006) does not exceed 2 crore.
• Micro (service) Enterprises. Enterprises engaged in providing/ rendering of industry
related services and whose investment in equipment (original cost excluding land and

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 building and furniture, fittings and such items as in 2.1.3) does not exceed 10 lakh.
• Khadi and Village Industries Sector (KVI): All advances granted to units in the KVI
sector, irrespective of their size of operations, location and amount of original
investment in plant and machinery. Such advances will be eligible for consideration
under the sub-target (60 per cent) of the small enterprises segment within the priority
sector.

Indirect finance

Indirect finance to the small (manufacturing as well as service) enterprises sector will include
credit to:
• Persons involved in assisting the decentralised sector in the Supply of inputs to and
marketing of outputs of artisans, village and cottage industries.
• Advances to cooperatives of producers in the decentralised sector viz. artisans village
and cottage industries.
• Subscription to bonds issued by NABARD with the objective of financing exclusively
non-farm sector (not eligible for classification under priority sector lending with effect
from April 1, 2007).
• Loans granted by banks to NBFCS for on lending to small (manufacturing as well as
service) enterprises sector.

3. OTHER SMALL BUSINESS AND SERVICE ENTERPRISES

• Loans granted to other small business and service enterprises such as, small road and
water transport operators, small business, professional and self-employed persons, and
other enterprises, engaged in providing/ rendering of services and whose investment in
equipment (original cost and excluding land and building) does not exceed 2 crore.
• Advances granted to retail traders dealing in essential commodities (fair price shops),
consumer stores, and;
• Advances granted to private retail traders with credit limits not exceeding 20 lakh.

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 4. MICRO CREDIT

• Loans of very small amount not exceeding 50,000 per borrower provided by banks to
the poor, either directly or through a group mechanism or through any intermediary (as
approved by Department of Banking Operations and Development of Reserve Bank of
India for the Banking Correspondent model), or to an NBFC/NGO for providing credit
to the Poor up to 50,000 per borrower,
• Loans to distressed poor to prepay their debt to lenders in The informal sector would
be eligible for classification under Priority sector. Poor for this purpose may include
those families who are below the poverty line in the respective areas. Such loans to poor
may also be classified under weaker sections within the priority sector.

5. STATE SPONSORED ORGANIZATIONS FOR SCHEDULED

CASTES/SCHEDULED TRIBES

Advances sanctioned to State Sponsored Organizations for Scheduled Castes/ Scheduled

Tribes for the specific purpose of purchase and supply of inputs to and/or the marketing of the
outputs of the beneficiaries of these organizations.

6. EDUCATION

Educational loans granted to individuals for educational purposes upto 10 lakh for studies in
India and 20 lakh for studies abroad. Loans granted to Institutions will not be eligible to be
classified as priority sector advances.

7. HOUSING

• Loans upto 15 lakh, irrespective of location, for construction of houses by individuals,

excluding loans granted by banks to their own employees.
• Loans given for repairs to the damaged houses of individuals up to 1 lakh in rural and
semi-urban areas and up to 2 lakh in urban and metropolitan areas.

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 • Assistance upto 1.25 lakh per housing unit given to any governmental agency/ non-
governmental agency (other than Housing Finance Companies) for construction/
reconstruction of houses or for slum Clearance and rehabilitation of slum dwellers.
• Assistance upto 5 lakh per housing unit given to Housing Finance Companies for
construction/ reconstruction of houses or for slum clearance and rehabilitation of slum
dwellers.

8. WEAKER SECTIONS

The weaker sections under priority sector shall include the following:
• Small and marginal farmers with land holding of 5 acres and less, and landless
labourers, tenant farmers and share croppers;
• Artisans, village and cottage industries where individual credit limits do not exceed
50,000;
• Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY);
• Scheduled Castes and Scheduled Tribes;
• Beneficiaries of Differential Rate of Interest (DRI) scheme;
• Beneficiaries under SwarnaJayanti Shahari Rozgar Yojana (SJSRY); (g) Beneficiaries
under the Scheme for Liberation and Rehabilitation of Scavengers (SLRS);
• Advances to Self Help Groups;
• Loans to distressed poor to prepay their debt to informal sector, against appropriate
collateral or group security. Within priority sectors, domestic commercial banks have
to give 10 per cent of their net lending to weaker sections, but no such specific target is
set for foreign banks.

9. EXPORT CREDIT

This category will form part of priority sector for foreign banks only.

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 TARGETS

Targets and sub- targets set under priority sector lending for domestic and foreign banks
operating in India are furnished below:

Domestic Commercial banks Foreign banks

Total Priority Sector 40 per cent of Adjusted Net 32 per cent of ANBC or
advances Bank Credit (ANBC) or credit equivalent amount of
credit equivalent amount of Off-Balance Sheet Expo-
Off-Balance Sheet Exposure, sure, whichever is higher.
whichever is higher.
Total Agricultural Advances 18 per cent of ANBC or credit No Target
equivalent amount of Off-
Balance Sheet Exposure,
whichever is higher.
Small Enterprises Advances Advances to small enterprises 10 per cent of ANBC or
sector will be reckoned in credit equivalent amount of
computing performance Off-Balance Sheet Expo-

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 under the overall priority sure, whichever is higher.
sector target of 40 per cent of
ANBC or credit equivalent
amount of Off-Balance Sheet
Exposure, whichever is
higher.
Micro Enterprises within (1) 40 per cent of total Same as domestic banks
Small Enterprises Sector advances to small enterprises
should go to micro
(manufacturing) enterprises
having investment in plant
and machinery upto 5 lakh
and micro (service)
enterprises having investment
inequipment up to 2 lakh;

(2) 20 per cent of total

advances to small enterprises
should go to micro
(manufacturing)enterprises
with investment in plant and
machinery above 5 lakh and
up to 25 lakh, and micro
(service) enterprises with
investment in equipment
above 2 lakh and up to 10
lakh. (Thus, 60 per cent of
small enterprises advances
should go to the micro
enterprises).
Export Credit Export credit is not a part of 12 per cent of ANBC or
priority sector for domestic credit equivalent amount of
commercial banks. Off-Balance Sheet

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 Exposure, whichever is
higher.
Advances to weaker sections 10 per cent of ANBC or credit No Target
equivalent amount of Off-
Balance Sheet Exposure,
whichever is higher.

PROMOTION OF UNDER PRIVILEGED CLASSES

As India is a vast and diverse country, there is a disparity in income and education levels across
various sections of the society that leads to varied levels of exposure to financial services and
products; hence there are certain sections who lack awareness/ are unaware of various financial
products. As per the National Strategy for Financial Inclusion 2019-24, other factors causing
financial exclusion are lack of surplus income, high transaction cost, lack of required
documents to avail the services and products as well remoteness of the unserved population.

Financial inclusion schemes

The policy makers in India have always been aware of the importance of financial inclusion
for economic growth. The government commenced the financial inclusion process way back
in the 1950s by nationalising life insurance companies and banks. Subsequently, it undertook
a host of initiatives and launched numerous programmes such as the National Strategy for
Financial Inclusion (NSFI), in June 2017, that is backed by the Financial Inclusion Advisory
Committee (FIAC). The government also introduced the following programmes:

Pradhan Mantri Jan Dhan Yojana (PMJDY)

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Launched in 2014, the PMJDY is one of the flagship schemes of the government with an
objective to ensure financial inclusion of those individuals who do not have a bank account.
The scheme offers various financial services, including basic savings & deposit accounts,
insurance, pension, remittance and credit, in an affordable manner. Through this scheme, an
individual can open a basic savings bank deposit (BSBD) account in any bank branch or a
business correspondent (Bank Mitra) outlet.

Following that, the account holder is offered a ‘RuPay’ debit card and has no prerequisites to
maintain any minimum balance in his/her account. The account holder is eligible for other
benefits including accidental insurance cover of Rs. 1 lakh, which was increased to Rs. 2 lakhs
for new accounts that were opened after August 28, 2018; and overdraft facility (OD) up to Rs.
10000. In addition, the account holder can avail other schemes such as Atal Pension Yojana
(APY), Direct Benefit Transfer (DBT), Micro Units Development & Refinance Agency Bank
(MUDRA) and others.

As of September 01, 2021, under the scheme, the government opened accounts for 43.2 crore
beneficiaries—with deposits amounting to Rs. 144870.1 crore and issued 31.3 crore RuPay
cards. Of this, 55.4% account holders were women and 66% accounts were in rural or semi-
urban areas.

Pradhan Mantri Mudra Yojana (PMMY)

Launched in 2015, the scheme aims to provide term loans and working capital loans with a
corpus of Rs. 3000 crore to small businesses dealing in manufacturing, trading and services
sectors, including the agriculture sector (poultry, beekeeping, dairy, etc.). The scheme offers
loans in three categories – Shishu (up to Rs. 50000), Kishore (up to Rs. 5 lakhs) and Tarun (up
to Rs. 10 lakhs).

A MUDRA card (RuPay card) is issued by Member Lending Institutions (MLIs) to the
borrowers for drawing working capital loan from any ATM or make purchases.

Barring 2020-21, each year the MLIs have been successful in achieving the annual targets set
by government. For 2021-22, the target of Rs. 3 lakhs crores have been set, of which 20% has
already been achieved as of July 30, 2021.

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Stand-Up India

Launched in 2016, the scheme aims to promote entrepreneurship among scheduled

castes/scheduled tribes and women by offering bank loans worth between Rs. 10 lakhs and Rs.
1 crore to at least one SC/ST borrower and one-woman borrower per bank branch of Scheduled
Commercial Banks. In this scheme, loans are specifically offered for setting up greenfield
enterprises in manufacturing, trading and services sectors.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

Launched in 2015, the scheme aims to insure the uninsured, especially the underprivileged
class, by providing cover for death due to any reasons. The scheme offers a renewable one-
year term life cover of Rs. 2 lakhs to all subscribing bank holders (aged 18-50). With an annual
premium of only Rs. 330, the scheme is administered by LIC and other insurance companies
that offer life insurance on similar terms. As of July 2021, under the scheme, the cumulative
enrolments stood at 10.6 crore, including 45.4% women, with the total claim amounting to Rs.
5154.8 crore.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Launched in 2015, like the PMJJBY scheme, the PMSBY scheme offers a renewable one-year
accidental death-cum-disability cover to all subscribing bank holders (aged 18-70). With an
annual premium of only Rs. 12, a subscriber is eligible for a claim of Rs. 2 lakhs in case of
death or complete disability and a claim of Rs. 1 lakh in case of partial disability.

This scheme is offered by public sector general insurance companies (PSGICs) and other
insurance companies that plan to offer the product on similar terms.

As of July 2021, under PMSBY scheme, cumulative enrolments stood at 24 crores, including
45.8% women, with the total claim amounting to Rs. 972.6 crore.

In addition to the above-mentioned schemes, the government has launched Atal Pension
Yojana (providing monthly pension to eligible subscribers not covered under any organized
pension scheme) and Pradhan Mantri Vaya Vandana Yojana (providing protection to senior
citizens from future interest rate shocks due to market uncertainties).

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Jan Dhan-Aadhaar-Mobile (JAM)

Under this initiative, by linking Jan Dhan bank accounts with Aadhaar and mobile numbers,
the government aimed to create a digital infrastructure that can be leveraged for various
purposes including transferring direct benefits, adopting pension schemes, supporting credit
flows and promoting digital payments through ‘RuPay’ cards. This initiative has enabled DBT
from the government under various schemes to 8 crore accounts. Aadhaar-based Biometric
Authentication and Digital Payments Solutions.

As more and more bank accounts are linked with Aadhaar numbers, executing online financial
transactions becomes easy at various banking touchpoints. More than 125 crore digital
identities have been generated under Aadhaar, enabling them to authenticate and carry out
transactions. Using biometric ID, cost-effective payment solutions have been implemented
including Immediate Payment Service (IMPS), RuPay Debit card, Unified Payments Interface
(UPI), etc.

Jan Dhan Darshak

Through this ‘Jan Dhan Darshak’ mobile application, the government aims to help citizens
locate and view banking touchpoints such as ATMs, bank branches, bank mitras, post offices
and common services centres (CSCs). The service is also being used by authorities to identify
unbanked locations/villages that do not have any banking touchpoints. The app will act as a
guide for citizens to locate financial service touchpoints at a given location in the country.
According to the government, the app has mapped >8 lakh financial service touchpoints.

To provide universal financial services, it is important to have a digital infrastructure for

various touchpoints including co-operative banks, payment banks and small finance banks,
office of local government bodies and common service centres (CSCs). In addition,
customising products and services (such as using vernacular languages in mobile apps) to suit
the targeted population can help in efficient delivery of basic bouquet of financial services.

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 CONCLUSION

Priority sector lending has enabled many to avail the facilities of institutional credit, which
are otherwise difficult provided the exploitative non-institutional credit sources farmers,
share crop growers usually resort to as a last option. It has also given impetus to the growth
of small and micro enterprises, creating more enterprises, promoting entrepreneurship.
However, there are some apprehensions as to whether loans to certain domains can create
NPAs for the banks. The dichotomy of reliable credit and cases translating to NPAs should
be addressed. Genuine enterprises in need of credit should not suffer.

Further, there exist expert views as to how converting some part of priority sector lending
to a grant paid directly by the government can unlock large amounts of efficiency in the
system. It is believed to dramatically increase the valuation of public sector banks, and be

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of immense help to weaker segments, in need of institutional credits. All stakeholders must
come forward to evolve a mechanism to reduce the NPA contribution from potential
sectors. Moreover, it will ensure the necessary institutional credit facilities to various
ventures, enterprises, farmers, and other similar groups, providing them breathing space to
shape their dreams, and growth and livelihood.

Bibliography
• Banking Law and practices, Sukhvinder Mishra
• Laws of Banking, Dr SR Myneni

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