Priority sector lending

Subject: Economy

Context:

• Banks that are not able to lend under priority sector on their own, can make outright purchases of such lending from other banks and also buy Inter Bank Participation Certificates
• Recent change announced by the Reserve Bank of India in PSL is to remove the imbalance among different geographical areas.

Concept:

• Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections..
• This is essentially meant for an all-round development of the economy as opposed to focusing only on the financial sector
• Priority Sector includes the following categories:

(i) Agriculture
(ii) Micro,SmallandMediumEnterprises
(iii) ExportCredit
(iv) Education
(v) Housing
(vi) SocialInfrastructure
(vii) RenewableEnergy
(viii) Others

Priority Sector Lending Certificates (PSLCs):

• Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall.
• This also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector.
• Under the PSLC mechanism, the seller sells fulfilment of priority sector obligation and the buyer buys the obligation with no transfer of risk or loan assets

Ranking districts:

• The RBI has decided to rank districts based on per capita credit flow to priority sector and build an incentive framework for districts with comparatively lower flow of credit and a disincentive framework for districts with a comparatively higher flow of priority sector credit.
• From FY 2021-22, a higher weight (125 per cent) would be assigned to the incremental priority sector credit in the identified districts where the credit flow is comparatively lower (per capita PSL less than ₹6,000), and a lower weight (90 per cent) would be assigned for incremental priority sector credit in the identified districts where the credit flow is comparatively higher (per capita PSL greater than ₹25,000).
• Accordingly, 205 districts are classified as ‘high PSL credit’ eligible for 90 per cent weightage and 184 districts are classified as low ‘PSL credit’ eligible for 125 per cent weightage. The remaining districts will continue to have an existing weightage of 100 per cent.
• Each district draws an Annual Action Plan and this includes targets under different priority sector credit and each district is assigned to a bank under Lead Bank Scheme. The primary responsibility to reach the priority sector target for the district is with the Lead Bank with the help of other banks and district administration.