Priority Sector Lending Certificates

Subject: Economy

Concept:

• Priority Sector Lending Certificates (PSLCs) are instruments that enable banks to achieve their priority sector lending targets without actually disbursing loans to sectors outside their comfort zone.
• PSL certificates allow banks sitting on surplus loans to a priority sector to sell certificates to banks that haven’t met their targets, pocketing a sizeable fee for this trade. The said loans however do not change hands.
• The RBI mandates banks to lend a minimum of 40 per cent of their total loans to priority sectors such as agriculture, education, social housing, and micro enterprises.
• Aside from the overall target, banks are also required to meet sub-targets within this, such as 18 per cent towards agriculture (8 per cent for small and marginal farmers), 7.5 per cent for micro enterprises and 10 per cent for weaker sections.
• While banks almost always meet the overall target, keeping up with the sub-targets was getting difficult for banks with limited expertise in certain sectors. Also, banks were sceptical about operating out of their niche, fearing poor loan judgments and dents to their profits.
• Earlier, in the event of a shortfall in any specific category, banks had to make good this shortfall by either buying out such priority sector loans from other banks or had to pay a penalty to the Rural Infrastructure Development Fund (RIDF).
• However, from April 2016 onwards, the RBI launched an online trading platform — the PSLC platform — to allow banks to trade in PSLCs to meet the sectoral sub-targets. Rather than offering fresh loans, banks were only required to hold PSLCs reflecting lending by others.