Tenets of PSL or, Priority Sector Lending

Tenets of PSL or, Priority Sector Lending

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The Reserve Bank of India (RBI) has given banks the important responsibility of performing priority sector lending, which entails allocating a specific amount of bank lending to a small number of particular industries. The economy's priority sectors are those that may not receive adequate credit in a timely manner. The sectors could be agriculture and related activities, micro and small businesses, housing for the homeless, education for students, and other groups with lower incomes and fewer resources. Instead of focusing solely on the financial sector, this essentially aims to develop the economy as a whole.

Priority Sector Lending falls into eight broad categories, as stated in a 2016 RBI circular. These are: 1) Agriculture; 2) Export Credit; 3) Micro, Small, and Medium-Sized Businesses; 4) Education; 5) Housing; 6) Social Infrastructure; 7) Renewable Energy; 8) Other Personal loans to the underprivileged, loans to people in financial trouble, and loans to SC/ST-sponsored organizations are all examples of the other category.

What function does the Rural Infrastructure Development Fund (RIDF) serve?

The primary objective of the RIDF, which was established in FY 1996, was to use an interest rate policy instrument to encourage commercial banks to achieve their PSL targets. Specifically, lower investment interest rates under RIDF in comparison to net returns on advances to priority sectors. Depending on the extent to which PSL targets fall short, the interest rate charged to RIDF currently ranges from 2% below the bank rate to 4% below it. This has a direct impact on PSB profitability. PSBs cannot afford this hit in a situation of stressed profitability because it has a direct impact on their profitability, retained earnings, and the need for the government to inject capital.

Improvements to Priority Sector Lending (PSL)

There ought to be some distinct definitional modifications to PSL, at least in relation to the quantitative caps. The lending to MSMEs is a crucial component of the priority sector. Nevertheless, the definition of MSME dates back to 2006. As a result, the definition needs to be expanded to reflect the current state of the economy. The limit of Rs 5 crore per borrower for building social infrastructure activities like education in Tier II and Tier VI centers needs to be seriously reconsidered. To make renewable energy a worthwhile proposition in accordance with the current vision, the cap of Rs 15 crore that applies to borrowers associated with public utilities must be substantially increased. Expanding the definition of rural infrastructure to include rural roads, power plants, bridges, and other infrastructure is another topic to think about. We should also think about including food credit in PSL because food credit is mostly used to buy food grains and ensure food security, especially for the poor. Banks will be motivated to lend more to the affordable housing segment if the definition of affordable housing is aligned with the guidelines for the priority sector. An objective evaluation of whether municipal bonds should be included in PSL norms might be beneficial because it will significantly make it easier to raise funds for the necessary improvement of cities' social and economic infrastructure.