Priority Sector Lending

By Raghav Purohit
 The logic of PSL

•Constraints in credit flow to sectors which

support a large number of livelihoods
•Preference for industry, commerce, trade
and security based financing
•Banks must support vulnerable and
unglamorous sectors also.
 History so far

•Introduced in 1969
•Quantitative targets brought in 1974
•Stipulation of 40% target in 1985
•Narasimham committee I on financial
sector reforms did not favour continuation
•Narasimham committee II on financial
sector reforms favoured continuation
•Recent review by RBI internal Working
Group in 2005 supported continuation
 Developments

•March 1980 – Priority Sector Advances

target raised to 40% by March 1985
•Sub-Targets also specified for lending to
Direct Finance to Agriculture and Weaker
Sections
•2nd Nat’n of 6 Com’l Banks – April 1980
•Banking Sector Reforms – 1993 onwards
 Priority Sector broadly comprises

•1. Agriculture
•2. Small scale industries
•3. Small road and water transport operators
•4. Small business
•5. Retail trade
•6. Professional and self-employed persons
•7. State sponsored organisations for SC/ST
•8. Education loans
•9.Housi ng.
•10. Consumption loans for weaker sections
•11. Loans to SHGs and NGOs for onlending to SHGs
•12. Loans to the software industry
•13. Loans to food and agro-processing sector
•14. Investment by banks in venture capital
 Targets under Priority Sector
Particulars Dom’ Banks Foreign Banks

Total PS Adv 40% of NBC 32% of NBC

Total Agri Adv 18% of NBC No Target

SSI Advances No Target 10% of NBC

Export Credit Not included 12% of NBC

Adv to W S 10% of NBC No Target

 Classification of PS Advances

1. Agriculture
1. Direct Finance to Farmers
•Purchase of Agricultural equipments and machinery
•Development of Irrigation Potential
•Reclamation and Land Development
•Construction of Farm buildings and structures
•Construction of Storage facilities
•Production and processing of hybrid seeds for crops
•Payment of Irrigation charges
•Other types of direct finance – Short Term loans, Medium Term loans
(Plantations, Allied Activities, etc)
 Classification of PS Advances...1

1.2 Indirect Finance to Agriculture

- Distribution of Fertilisers, pesticides, etc
- Electricity Boards
- PACS, FSS and LAMPS
- Deposits in Rural Infrastructure Dev Fund
- Subscription to bonds of REC / NABARD
- Others – Hire Purchase, Storage facilities...
 Classification of PS Advances...2

2. Small Scale Industries

•Small Scale and Ancillary Industries
•Tiny Enterprises
•Small Scale Service and Business Enterprises
•Industrial Estates
•KVI Sector
 Small Scale Industry?

•SSIs are those engaged in the manufacture,

processing or preservation of goods, and
whose investment in plant and machinery
(Original cost) does not exceed Rs. 1 crore.

•SSIs include units engaged in mining or

quarrying, servicing and repairing of
machinery.

•Ancillary units – also investment not to

exceed Rs 1 crore to be treated as SSI
 SSI ... ...
•Investment of Rs. 1 crore enhanced to Rs. 5
crore in respect of certain specified items –
hosiery and hand tools by GOI

•Tiny Enterprises – investment in P&M upto Rs.

25 lakhs, irrespective of location of unit
•SSSBEs – investment upto Rs. 10 lakhs in Fixed
Assets, Land and Buildings
 Classification of PS Advances...3
3. Other Activities / Borrowers
- Small Road and Water Transport Operators
- Retail Trade Advances
- Small Business
- Professional and Self Employed Persons

- State Sponsored Organisations for

Scheduled Castes and Secheduled Tribes

- Education / Housing / Indirect Finance

- Consumption Loans / Loans to SHGs / NGOs /

Micro Credit / Food and Agro-based Processing Sector / Software
Industry and Venture Capital
 Certain Types of PSL

• 1. Investments in Special Bonds

•SFCs / SIDCs
•REC/NABARD/SIDBI /NSIC/NHB/HUDCO
•Lines of Credit
•Bills Re-discounting
•Deposits in RIDF
•Leasing and Hire Purchase
 Targets for PS lending
• Main Targets – 40 % of Net Bank Credit
• –18 % of NBC to Agricultural Sector
• –10% of NBC to ‘weaker sections’
• –1% of previous year’s total advances under
• Differential Rate of Interest (DRI) Scheme
• (@ 4% pa interest; concessional terms;
working
• capital and term loans – below Rs. 10,000)
 Weaker Sections

1. SMF with <5 acres; landless labourers, tenant

farmers and share croppers
2. Artisans, Village / Cottage Inds – Rs 50,000
3. Swarna jayanti Gram Swarojgar Yojana
4. SCs / STs; DRI Scheme;
5. Swarna jayanti Shahari Rojgar Yojana
6. Scheme for Liberation and Rehabilitation of
Scavengers (SLRS)
7. Advances to Self Help Groups
 Targets for Foreign Banks

•Min lending to PS Advances – 32 per cent

•No branches in Rural Areas !
•PS include export credit provided by them
•Within the target – lending to SSIs should
not be less than 10% of NBC
•Export Credit should not be less than 12%
•Any shortfalls in targets – amount should be
deposited in bonds of SIDBI
 Priority sector and inclusion

•PS can facilitate achievement of inclusion

agenda
•Focus to shift from underserved sectors to
underserved people
•States/regions with lower intensity of coverage
to be prioritised
•Microfinance would be a critical tool in
inclusion
 Microfinance –an alternative to PSL?

•29 lakh SHGs covered

•51% farmer household connected to institutions.
•Network constraints of banks make microfinance
an ideal option for PSL.
•Facilitator model could provides the means
•But microfinance is not substitute to PSL.
•Loan volumes about 1% of PSL portfolio.
 Recent changes

•Adjusted net bank credit (net bank credit + govt

security investment held to maturity) as of previous
year end as the basis

•Investment in securitized assets with underlying PSL loans reckoned

•PSL portfolio purchase reckoned
•Participation certificates (risk sharing) with underlying PSL reckoned
•Loans to NGOs/MFIs for on-lending reckoned

•Fresh deposits with NABARD/SIDBI not reckoned

 Miscellaneous

•All PS loan applications upto Rs. 25,000 should

be disposed off within a fortnight.
•Others within 8 to 9 weeks.
•Loans up to Rs. 2 lakhs – Interest rate not
to exceed Prime Lending Rate (now base rate).
•Monitoring by RBI – Through periodic returns –
Lead Bank Scheme – Review meetings at Block,
Dist and State levels.
 The road ahead
•Reasons exist for continuation
•Recent changes likely to improve credit-flow and
quality of compliance
•Restrictions on banks’ autonomy should be withdrawn
•Facilitators to play a key role
•Banks with network and staff would be able to
sell portfolios, securitised assets and IBPCs
•Cooperative banks and RRBs could benefit through
portfolio sales
•MFIs likely to benefit with more bank credit
•Microfinance will get a boost
 Conclusion

•Time for review of targets of each sector

•People and regional focus needed
•Inclusion objective to be integrated with PSL
•Tighter monitoring and effective enforcement
•Need for a sunset clause – with achievement of
full financial inclusion?
Thank you