Priority Sector Lending initiative brings focus on those specific sectors of the economy which may not usually get timely and adequate credit. These are the sectors that are vital for the economy but might be less preferred by Banks and financial institutions for extending an advance due to high risk, low margins, or any other reason.
It is an important role given by the Reserve Bank of India (RBI) to all the scheduled banks for providing a certain percentage of the bank’s lending book to these specific sectors.
The sectors are broadly the agriculture sector and allied activities, micro and small enterprises (MSEs), housing for the poor, education loan for students, and such similar advances to the other low-income groups, and weaker sections.
This is essentially meant for all-round development of the economy as opposed to focusing only on the financial sector.
According to a circular released by the RBI, there are eight broad categories of the Priority Sector Lending.
They are classified as the following:
The other category includes personal loans to weaker sections, loans to distressed persons, loans to state-sponsored organizations for the Scheduled Cast and Scheduled Tribe.
In March 2020, the RBI issued its updated guidelines for Urban Cooperative Banks (UCBs) for revised limits on large exposure and revised Priority Sector Lending (PSL) targets. PSL targets are set and calculated in percentage of the adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (CEOBSE), whichever is higher. Previously, the overall priority sector lending target for UCBs stood at 40% of ANBC or CEOBSE, whichever was higher.
In its latest guidelines, the RBI has revised the overall PSL target for UCBs which have now been increased to 75 percent of ANBC or CEOBSE, whichever is higher. The extant sub-targets under the priority sector, however, remain unchanged.
The banks have up till March 31, 2024, which is set as a target date by the RBI, to comply with the revised targets. The transition is supposed to happen in a phased manner as per the following milestones set:
UCBs are expected to prepare an Action Plan for compliance with the aforesaid revised exposure limits and PSL targets with the approval of their Board. They have also been advised to establish an appropriate system or mechanism which will help them regularly monitor the progress made under the said/ set Action Plan for compliance with these revised targets.
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