Why Priority Sector Lending is in the News?
The Reserve Bank of India released revised master directions for priority sector lending. In its most recent updates, the governing body streamlined policies and emphasized sector lending for industries that may need assistance with credit & funding.
The central bank is encouraging domestic, and commercial banks, foreign banks, regional rural banks, and small finance banks to specific predetermined economic sectors. In its most recent update to the master directions on priority sector lending, RBI focuses on a renewable energy sector and green mobility.
Dwindling resources and climate change compelled economies all over to renovate & restructure their policies, making them more environmentally friendly. India is well ahead in its implementation of green policies, as evident from the RBI’s directives to classify renewable energy bank loans and e-vehicle loans as segments of priority sector lending.
History of Priority Sector Lending in India
Priority sector lending emerged in India in 1966 when the Indian Government conducted priority sector classification and identified certain sectors as crucial to economic development, looking for ways to make them financially secure.
- Agriculture and allied activities and the small industry sector were considered priority sectors that needed better credit support.
- Formal regulations and guidelines were codified. The term Priority Sector was defined in 1972 via a report presented by the RBI to the National Credit Council, a body set up in 1968 to determine bank credit requirements by different sectors.
- Nationalisation of banks witnessed direct lending of priority sector loans from public sector banks to the agriculture sector, village industries sector, micro-enterprises, small and medium enterprises, education, industrial estates, etc.
- With time, industries categorised as priority sectors have evolved to include numerous other domains. Yet, the RBI maintains a priority focus on agriculture and allied activities, village and cottage industries, and micro small and medium enterprises.
Priority Sector Lending Targets
The Reserve Bank of India updated the priority sector lending regulations and guidelines per the latest Master Directions. The reviews conducted were comprehensive in nature and centred around an aim to coordinate instructions meted out to banks & financial institutions & align policies to emergent national priority concerns.
The latest reviews also focus on Sustainable Development Goals and environmentally friendly policies.
Priority sector lending to the agricultural sector includes farm credit & crop loans (Agriculture and allied activities). Farm credit includes loans sanctioned to farmers individually and through Self-Help & Joint Liability groups.
Loans are given to farmers who develop their own farm produce, engage in animal husbandry, horticulture, bee keeping, sericulture, marginal farmers, distressed farmers indebted to private lenders, development of agriculture infrastructure, grid-connected agriculture pumps, etc.
Domestic, commercial banks, foreign banks, regional rural banks, and small finance banks with more than 20 branches must put aside 18 per cent of ANBC or CEOBE, whichever is higher for priority sector lending to the agricultural sector.
2. Micro, Small and Medium Enterprises:
According to RBI’s latest guidelines, micro, small and medium enterprises eligible for priority sector lending must comply with the specifications in the First Schedule of the Industries Development & Regulation Act 1951.
Start-ups categorised as MSMEs are eligible for priority sector lending of up to ₹ 50 crores. In addition, MSMEs in the services sector can receive priority sector lending of up to 5 crores for micro & small businesses and up to 10 crores for medium enterprises.
The Reserve Bank of India directs scheduled commercial banks in the banking system (domestic commercial, foreign banks, RRBs, SFBs) to reserve 18 per cent of ANBC or CEOBE, whichever is higher, for developmental loans in this priority sector.
3. Export Credit:
Any export credit associated with the agricultural & micro enterprises is to be deemed as priority sector lending. Domestic & foreign banks, SFB, RRB, primary urban co operative banks, etc., set aside 2% of their Adjusted Net Banking Credit or CEOBE, whichever is higher.
Education loans of up to ₹ 20 lakhs are eligible for priority sector lending. Loans, thus classified, will be deemed priority till their maturity
Individual housing loans of up to ₹35 lakh for housing construction in a metropolitan centre are considered priority sector lending. In addition, ₹25 lakh priority sector lending is allotted for construction in non-metropolitan centres. The loan limit in both these cases is set at ₹45 and ₹30 lakh, respectively.
Repair loans of ₹10 lakh in metropolitan centres and $ 6 lakh in other centres are classified as priority sector lending.
One key thing to note is that housing loans of employees of the banking system cannot be categorised as priority sector lending.
6. Social Infrastructure:
Social infrastructure bank loans are crucial for grass-root development; per the RBI’s directives, bank loans of up to ₹ 5 crores per borrower fall under the priority sector lending category. Bank loans for building health care facilities, schools, water and sanitation facilities, sanitation systems, etc., fall under this category.
7. Renewable Energy:
The latest update to RBI’s priority sector lending guidelines heavily focused on environmentally friendly policies and achieving Sustainable Energy Goals.
Borrowers can get bank loans of up to ₹ 50 crores for the installation of solar-based power generators, biomass based power generators, street lighting systems, windmills, etc. Such loans will be deemed priority sector lending by the RBI.
Loans to members of SHG/JLG that satisfy the RBI’s master directions criteria are considered priority sector lending. Values of such loans cannot exceed ₹2 lakh and be used for developmental activities such as repairs, construction of houses & toilets, etc.
Loans offered to disadvantaged & distressed individuals for prepayment of credit to non institutional lenders also receive the other priority sector classification tag. Such loans cannot exceed ₹1 lakh.
Sanctioned loans of state organisations representing SC/STs also fall under the priority sector lending category.
What are the Weaker Sections under the Priority Sector?
Loans offered to the following fall under the Weaker Sections cluster in Priority sector lending per RBI’s directives.
- Small and marginal farmers
- Cottage industries with low credit limits of not more than ₹ 1 lakh
- Legal recipients of Government Sponsored Schemes
- Scheduled Castes & Tribes
- Self Help Collectives
- Women beneficiaries of government schemes
- Disadvantaged farmers indebted to non institutional creditors
- Disabled persons
- Minority Groups
- Other distressed persons
Who will Monitor the PSL of Banks on a Quarterly Basis?
The RBI conducts routine monitoring quarterly to ensure that all compliant banks & financial institutions achieve their PSL target.
Some of the Standard Guidelines for All Banks from the RBI
Banks must comply with the following RBI directives concerning priority sector lending:
- Bank credit interest rates must follow the guidelines set by the Department of Regulations, RBI.
- No service charges of any other kind can be levied for loan amounts up to ₹ 25000.
- All banks must maintain well-defined electronic records containing all details of all priority sector lending. The records must be made available to inspection agencies when required.
- Banks must acknowledge all priority sector loan applications within a set time limit.
Priority sector lending offers adequate and timely credit to the weaker sections of the economy, who play a crucial role in its development. Easy access to credits and lower interest rates enable grassroots development, improved living standards, and poverty alleviation.
MSMEs in the services sector can receive priority sector lending of up to 5 crores for micro & small businesses and up to 10 crores for medium enterprises.
The Reserve Bank of India directs the banking system (domestic commercial, foreign banks, RRBs, SFBs) to reserve 18 per cent of ANBC or CEOBE, whichever is higher, for lending to the micro, small and medium sector as priority sector lending.