Priority Sector Lending in India - Explained

If you know anyone who’s been working in Banks as Officer and specially in the Loans and Advances section – you would know that a Bank/Branch has to adhere to something called PSL/PSA targets.
Banks under RBI’s strict directives has to adhere to giving loans to ‘priority sector’ compulsorily. These loans are knows as priority sector loans or priority sector advances and constitutes an important aspect of banking functions.

Banks other than being an institution which provides depositing and lending facilities is also the pulse of an economy. It encourages saving and mobilizes businesses – thus, in other words it aids nation building and economic growth and development.

No growth or development is complete if not wholesome – and wholesome would include the poor, back ward and needy sections of the society too.

Thus, priority sector lending focuses of those loan projects which get ignored in the normal ‘financial services’ plans – this is doing something good and
progressive!

As far as you and I are concerned – this is a very important topic for interviews from experiences of friends who are now in the Banking industry!

So…

1. What is meant by Priority Sector?

Priority sector refers to those sectors of the economy which may not get timely and adequate credit, and may be ignored because they are low income generating sectors. But for the overall and holistic development of an economy and the country – the progress of these sectors are important too, and they have been given a special status as ‘priority sector’, for their benefit and for banks to follow RBI rules and regulations with respect to priority sector lending.


2. What are the different categories under priority sector?

Priority Sector includes the following categories:

  • Agriculture (Direct and Indirect finance)
  • Micro and Small Enterprises
  • Education
  • Housing
  • Export Credit
  • Others


3. How did the concept of ‘priority sector’ come about?

The concept was properly introduced as per recommendations of Work Group of Krishnaswami Committee in 1980; thereafter Banks have been regularly issued
directives on priority sector loans. Revision on rules/regulations has been made latest by M.V. Nair Committee in 2012.

It is the obligation of the bank to meet targets of priority sector loans, and the non-achievement of which is taken into account to gauge a Bank/its
Branch’s performance and has an impact on regulatory clearances/approvals from RBI.



3. What are the Targets and Sub-targets for banks under priority sector?

(Imp for interviews!)



Categories


Domestic commercial banks / Foreign banks with 20 and above branches

Total Priority Sector (Target)


40%
Total agriculture(Sub-target)
18%
Advances to Weaker Sections
10%

The % is a ‘percentage of Ajdusted Net Bank Credit (ANBC)/ Credit Equivalent of Off Balance sheet exposure (CEOBE), whichever is higher, of the preceding
31st March!

So, for example – the target will be 40% of the ANBC/CEOBE (whichever is higher amount) of last 31st March (last year’s).

And then we’ll see, on current year’s 31st March - how much, of the 40% amount, is being achieved in the current year – if there’s a shortfall –
in that case Banks give as loans the shortfall amounts to RIDF/NABARD – as they are financing agriculture.



4. What is 'Direct’ and ‘Indirect’ finance' in agriculture – as mentioned in point 2 -?

(having a basic knowledge about that entails under direct and indirect is desirable!)
Direct Finance includes any loan given to:

(i) individual farmers engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and
sericulture.

(ii) corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly
engaged in Agriculture and Allied Activities, up to an aggregate limit of Rs.2 crore per borrower. (– where the aggregate loan exceeds Rs. 2 cr per borrower, then it becomes indirect finance.)

(iii) small and marginal farmers for purchase of land for agricultural purposes.

(iv) distressed farmers indebted to non-institutional lenders/ sahukars.


And,

Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) are
indirect loans.



5. What are the limits for other sector?


Sr. No.:

Sector

Targets/Sub targets

1.

Education



- education + vocational courses studies in India

Upto Rs.10 lakhs


- education + vocational courses studies outside India

Upto Rs.20 lakhs

2.

Housing Loans



- metro cities/population above 10lacs

Upto Rs.25 lakhs


- other cities

Upto Rs.15 lakhs

These targets and rates are periodically revised by RBI keeping with the trends in the economy and need of the hour.

Some more related – important terms:


(i) Micro Finance: is the provision of thrift (very small) credit of very small amount to the poor in rural, semi-urban and urban areas for enabling them
to raise their income levels and improve living standards.

(ii) Micro Credit: (yes it is different!)

Micro Credit is the ‘supply of credit’ to the poor, through small loans not exceeding Rs.50,000 per borrower – either directly to the borrower, or indirectly through Self Help Groups/ Joint Liability Groups.

Even though these two terms are interchangeably used, they are different.

Micro finance is a broader concept – and includes loans, savings, insurance, money transfers, and other ‘financial products’ targeted at poor and low-income people.


Micro credit refers more specifically to making small loans available to poor people, especially to those poor people who are normally excluded from financial services - through programmes designed specifically to meet their particular needs and circumstances.

That is all on this topic. Hope this helps!

Good luck and stay focused!


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