The Reserve Bank of India (RBI) recently issued revised Priority Sector Lending (PSL) guidelines. It is more in line with evolving national priorities and puts a greater emphasis on inclusive growth.

Revised Priority Sector Lending (PSL) guidelines:

• The revised priority sector lending guidelines included entrepreneurship and renewable resources.
• Bank loans for start-ups (up to 50 crores), loans to farmers for the construction of solar power plants, for solarisation of grid-connected agriculture pumps, and loans for the establishment of compressed biogas (CBG) plants have all been added to the priority sector’s list of new categories eligible for financing.
• Furthermore, loan limits for renewable energy have been doubled and credit limits for health infrastructure (including those under ‘Ayushman Bharat’) has also been doubled for improvement of health infrastructure.
• Its aim is to resolve regional disparities in the flow of priority sector credit at the district level.
• The revised guidelines would improve credit penetration in credit-deprived regions, increase lending to small and marginal farmers and vulnerable groups, and increase credit for renewable energy and health infrastructure.

Priority Sector Lending (PSL):

• The provisions of PSL apply to every Commercial Bank including Regional Rural Bank (RRB), Small Finance Bank (SFB), Local Area Bank and Primary (Urban) Co-operative Bank (UCB) other than Salary Earners Bank licensed to operate in India by the Reserve Bank of India.
• All scheduled commercial banks and foreign banks (with a sizeable presence in India) are mandated to set aside 40% of their Adjusted Net Bank Credit (ANDC) for lending to these sectors. Regional rural banks (RRB), co-operative banks and small finance banks have to allocate 75% of ANDC to PSL.
• Priority sector includes the following sectors:
  • Agriculture
  • Micro, Small and Medium Enterprises (MSMEs)
  • Export Credit
  • Education
  • Housing
  • Social Infrastructure
  • Renewable Energy
  • Startups and others.
• Banks having any shortfall in lending to the priority sector are required to contribute to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other funds with NABARD/NHB/SIDBI/MUDRA Ltd., as decided by Reserve Bank from time to time.
• Besides RBI has devised a mechanism called Priority Sector Lending Certificates (PSLCs) to enable banks to achieve the priority sector lending target by the purchase of these instruments in the event of a 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 fulfillment of priority sector obligation and the buyer buys the obligation with no transfer of risk or loan assets.