PRIORITY SECTOR LENDING (PSL) (Syllabus: GS Paper 3 – Economy)

Context: The RBI recently revised its priority sector guidelines to encourage banks to provide small loans in economically disadvantaged districts with low average loan sizes.

Priority Sector Lending (PSL)

• About: PSL mandates banks to allocate a minimum percentage of their loans to sectors crucial for development or facing difficulties in loan access.
• Regulatory Updates: RBI periodically revises eligible sectors and loan limits under PSL regulations.
• Categories of Priority Sectors: Agriculture, Micro, Small, and Medium Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy and Others.
• Targets under PSL: Domestic SCBs and foreign banks with ≥20 branches: 40% of ANBC or CEOBE.

oForeign banks with <20 branches: 40% of ANBC or CEOBE, with specific sub-targets.

oRegional Rural Banks and Small Finance Banks: 75% of ANBC or CEOBE.

oPrimary (Urban) Co-operative Banks: Increasing to 75% from FY2025-26.

• Methods to Meet Targets: Banks fulfill PSL obligations through loans, credit facilities, financial products, and investments in eligible instruments.
• Priority Sector Lending Certificates: PSLCs are certificates issued against priority sector loans, enabling banks to meet PSL targets by purchasing these instruments.
• Function: Banks use PSLCs to cover deficits in priority sector lending, while also incentivizing increased lending to these sectors.

Revised RBI Guidelines:

• Loans in districts with low credit availability (< Rs 9,000 per person) receive 125% weight.
• High availability districts (> Rs 42,000 per person) receive 90% weight.
• Other districts maintain the current weightage, except outliers.