Banking Article, Banking Finance 2021, Banking Finance August 2021

Priority Sector Lending – Revamped Guideline

The Reserve Bank of India has come up with revised guideline of priority sector lending to align with emerging national priorities for better credit penetration to credit deficit areas by increased lending to weaker sections including small and marginal farmers, renewal energy and health infrastructure with a sharper focus on inclusive development.

To address regional disparities in the flow of priority sector credit, higher weightage has been assigned to incremental priority sector credit in identified districts where priority sector credit flow is comparatively low. It has been decided to rank districts on the basis of per capita credit flow to priority sector and incentivise the credit flow to the districts with comparatively having lower flow of priority sector credit along with credit flow to some specific sectors like clean energy, Health Infrastructure and weaker sections. Accordingly, from the Financial Year 2022 onwards, a higher weightage (125%) has been prescribed to the incremental credit to priority sector in the identified districts where per capita PSL is less than Rs. 6000/- and a lower weightage (90%) would be assigned for the incremental priority sector credit in the identified districts having per capita PSL greater than Rs. 25000/- where the credit flow is comparatively higher. The RBI has identified 184 districts with low PSL credit flow. In the revised PSL guideline, the targets for ‘Small and Marginal Farmers’ and ‘Weaker Sections’ are to be increased in a phased manner. Also higher credit limit has been given for Farmer Producers Organizations (FPOs)/ Farmer Producers Companies (FPCs) that undertaking farming with assured marketing of their produce at a pre determined price.

Lending to Renewal energy has also been doubled. Now new loans up to Rs. 30 crore to borrowers for the purposes like Solar based power generator, Biomass based power generators, wind mills, micro-hydel plants and for non conventional energy based public utilities are eligible for priority sector classification. Moreover, the loans up to Rs. 50 crores extended for start ups that are engaged in agriculture and allied activities are now eligible for priority sector classification.

Gist of revised Priority Sector Lending guidelines issued by Reserve bank of India on 04th September 2020 is appended:

The revised guideline is applicable to all commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks and Primary Urban Cooperative Banks (UCBs).

Following activities are categorised under Priority Sector:

  1. Agriculture– The lending to agriculture includes Farm Credits (Agriculture and Allied activities), Lending to Agriculture Infrastructure and Ancillary Activities.

Farm Credit – The eligible entities are Farmers (including SHGs & JLGs), Groups of individual farmers, Proprietorship firm of farmers directly engaged in agriculture and allied activities. Moreover, corporate farmers, Farmer Producer Organisation (FPOs/FPCs), Companies of Individual Farmers, Partnership Firms and cooperative of farmers engaged in agriculture and allied activities are also eligible subject to an aggregate limit of Rs 2.00 Crore per borrower. The major activities under farm credit are crop loan, Medium and long term loan for agriculture and allied activities, loans for pre and post harvest activities, loans to small and marginal farmers for purchase of agricultural land, loans against pledge/hypothecation of agricultural produce including warehouse receipt subject to a limit of Rs. 50.00 lacs and loans to farmer for installation of solar pump for agricultural purposes. Loans to FPOs /FPCs undertaking farming with assured marketing of their produce at a pre determined price subject to maximum up to Rs. 5.00 crore per borrowing are classified under priority sector.

Agriculture Infrastructure – Loans for construction of storage facilities like warehouse, market yards, godowns, silos including cold storage units and cold storage chains irrespective of their location, soil conservation, watershed management, plant tissue culture, agri-biotechnology, bio-pesticides, bio-fertilizers, vermi-composting, seed production etc subject to aggregate sanction limit of Rs. 1.00 crore per borrower from entire banking system.

Ancillary activities – Various activities like setting up of Agri-clinics and Agri-Business centres, Loans to custom hiring units who maintain a fleet of farm machine and equipment like Tractor, bulldozers, well boring equipments, threshers, combiners etc and undertake farm work for farmer on contract basis, loans sanctioned for on-lending to agriculture sector to Micro Finance Institutions (MFIs), Primary Agriculture Credit Societies (PACS), Farmer’s Service Societies (FSS), Large Sized Adivasi Multipurpose Societies (LAMPS), registered NBFC (permitted as per RBI Directions) are classified under priority sector. Moreover, loans to Food and Agro Processing unit up to Rs. 100.00 Crore, loans sanctioned to registered NBFCs and loans to MFIs for on-lending (up to Rs. 10.00 lakh per borrower) to agriculture sector as per Master direction of RBI in this regard are classified under Priority Sector Lending.

  1. Micro Small and Medium EnterprisesAll credit extended to MSMEs units as defined in gazette notification on credit flow to Micro, Small and Medium Enterprises are classified under priority sector lending. All loans to Khadi Village Industries (KVIs), Factoring transaction either through TReDS or ‘with recourse’ by banks (except RRBs and UCBs) pertaining to MSME, loans sanctioned by banks (other than RRBs, SFBs and UCBs) to Registered NBFCs and MFIs for on-lending (up to 20.00 lakh per borrower) to MSME sector as per Master direction of RBI in this regard, loans extend by banks (except UCBs) to cooperatives of producers in the decentralise sector like Village Artisans and Cottage Industries are under classified under Priority Sector Lending. Also credit outstanding in General Credit Cards like Artisan Credit Card, Laghu Udhami Card, Swarojgar Credit Card, Weaver’s Credit Card, overdraft in PMJDY account are qualified for PSL classification.
  2. Export CreditExport credit includes pre-shipment and post-shipment credit (excluding Off Balance Sheet Items). All export credit extended to Agriculture sector and MSME sector are classified under Priority Sector in their respective categories. Other than Agriculture and MSME sector the export credit are classified under priority as per the following table:
Domestic banks / WoS of Foreign banks/ SFBs/ UCBs Foreign banks with 20 branches and above Foreign banks with less than 20 branches
Incremental export credit over corresponding date of the preceding year, up to 2 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent to Off Balance Sheet Exposure (CEOBE) whichever is higher, subject to a sanctioned limit of up to Rs. 40 crore per borrower. Incremental export credit over corresponding date of the preceding year, up to 2 percent of ANBC or CEOBE whichever is higher. Export credit up to 32 per cent of ANBC or CEOBE whichever is higher

 

  1. EducationLoans extended to individuals for educational purposes including vocational courses up to 20.00 lakh are classified under Priority Sector Lending.
  2. HousingLoans sanctioned to individuals up to 35.00 lakh in metropolitan and up to Rs. 25.00 lakh in other centres for purchase / construction of dwelling unit per family provided overall cost of the dwelling unit and should not exceed Rs. 45 lakh in the metropolitan centre and Rs. 30.00 lakh in other centre by banks are eligible under Priority sector lending classification. Moreover, loans extended up to Rs. 10.00 lakh in metropolitan and up to Rs. 6.00 lakh in other centres for repairing of dwelling units are also eligible for priority sector lending classification. However, housing loan given to bank’s own employee are not to classified under PSL. Apart this, Banks loan sanctioned to Housing Finance Companies (HFCs) who are approved by National Housing Board (NHB) for on-lending with a cap of maximum Rs. 20.00 lakh for individual borrowers, bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers and loan sanctioned for affordable housing project subject to dwelling units with carpet area not more than 60 square meter are classified under Priority Sector Advances.
  3. Social Infrastructure – Loans extended to social infrastructure sector such as setting up schools, drinking water facilities and sanitation facilities including construction/refurbishment of household toilets and water improvements at household level etc subject to maximum 5.00 crore per borrower are to be classified under PSL. For building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres with a maximum of Rs. 10.00crore per borrower are also classified under Priority Sector Lending. Moreover, Bank loan (other than RRBs, UCBs and SFBs) to MFIs for on-lending to individuals as well as to members of SHGs/JLGs for water and sanitation facilities are also qualified for PSL classification subject to criteria mentioned in Master Direction in this regard by RBI.
  4. Renewable EnergyLoans up to 30.00 crore sanctioned for the purposes like solar based power generators, biomass based power generator, wind mills, micro-hydel plants and non-conventional energy based public utilities like street lighting system, remote village electrification are to be classified under Priority Sector Lending. Whereas for individual households loans maximum up to Rs. 10.00 lakh per borrower are qualified for PSL classification.
  5. Other loans as per the prescribed limit are also eligible for Priority Sector Classification. This includes the following
  • Loans not exceeding 1.00 lakh per borrower provided by banks directly to individuals and individual members of SHGs/JLGs provided the individual borrower’s household income does not exceed Rs. 1.00 lakh in rural area and Rs.1.60 lakh in non-rural areas.
  • Loans not exceeding 2.00 lakh per borrower provided by banks directly to individuals and individual members of SHGs/JLGs for activities other than Agriculture and MSME like for meeting social needs, construction or repair of house, construction of toilets or any viable common activity started by SHGs.
  • Loans up to 1.00 lakh per borrower to distressed persons (other than agriculture farmer) to prepay their debt to non-institutional lenders.
  • Loans sanctioned to State Sponsored Organization for Schedule Caste / Schedule Tribes for the specific purpose of beneficiaries of these organizations.
  • Loans up to   50.00 lakh to Start-ups that are engaged in activities other than agriculture and MSME.

The Revised Master Direction issued by RBI on Priority Sector clearly elaborates the definition and categories of weaker section. The loans sanctioned to the following borrowers are considered as lending under weaker section category

  • Small and Marginal Farmers
  • Artisans, village and cottage industries where individual credit limit does not exceed 1.00 lakh
  • Beneficiaries under Govt. Sponsored Schemes such as National Rural Livelihood Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
  • Schedule Caste and Schedule Tribe
  • Beneficiaries of Differential Rate of Interest (DRI) scheme
  • Self Help Groups (SHGs)
  • Distress farmers indebted to non-institutional lenders
  • Distress person other than farmer, with loan amount not exceeding 1.00 lakh per borrower to prepay their debt to non-institutional lenders
  • Individual women beneficiaries up to 1.00 lakh per borrower
  • Persons with disabilities
  • Minority communities
  • Overdraft availed by PMJDY account holders

Inter Bank Participation Certificates bought by banks (except UCBs), on risk sharing basis and the outstanding Priority Sector Lending Certificates (PSLCs) bought by banks are eligible for classification of respective categories priority sector provided the underlying assets are eligible to be categorized under respective categories of PSL.

The outstanding Priority Sector Lending Certificates (PSLCs) bought by banks will also be eligible for classification

The targets and sub targets for priority sector as per revised guideline of RBI are as follows:

Categories Domestic Commercial Banks (excluding RRBs & SFBs) and Foreign banks with 20 branches and above Foreign banks with less than

20 branches

Regional Rural Banks Small Finance Banks
Total Priority Sector 40 % of ANBC or CEOBE whichever is higher 40 % of ANBC or CEOBE whichever is higher(out of which up to 32% can be in the form of lending to Export and not less than 8 % in other priority sector) 75% of ANBC or CEOBE whichever is higher 75% of ANBC or CEOBE whichever is higher
Agriculture

 

18 % of ANBC or CEOBE whichever is higher Not Applicable 18 % of ANBC or CEOBE whichever is higher 18 % of ANBC or CEOBE whichever is higher
Micro

Enterprises

 

7.5 % of ANBC or CEOBE whichever is higher Not Applicable 7.5 % of ANBC or CEOBE whichever is higher 7.5 % of ANBC or CEOBE whichever is higher
Advances to Weaker

Section

 

12 % of ANBC or CEOBE whichever is higher Not Applicable 15 % of ANBC or CEOBE whichever is higher 12 % of ANBC or CEOBE whichever is higher
 

The revised targets for small & marginal Farmers and weaker section will be implemented in a phased manner as appended

Financial Year Small & Marginal Farmers Weaker Sections #
2020-2021 8% 10%
2021-2022 9% 11%
2022-2023 9.5% 11.5%
2023-2024 10% 12%
Weaker section target for RRBs will continue to be 15% of ANBC(Adjusted Net Bank Credit) or CEOBE(Credit Equivalent to off-balance sheet exposure) whichever is higher
 

The revised targets for Primary Urban Cooperative Banks shall also be increased  from 40% to 75 % of ANBC or CEOBE whichever is higher in a phased manner as appended

Existing Target March 31,2021 March 31,2022 March 31,2023 March 31,2024
40% 45% 50% 60% 75%
Micro Enterprises – 7.5 % of ANBC or CEOBE whichever is higher
Advances to Weaker Section -12 % of ANBC or CEOBE whichever is higher

All scheduled commercial banks and foreign banks (with sizable presence in India) are mandated to set aside 40% of their ANBC for lending to specified sectors like Agriculture, MSMEs (Micro Small and Medium Enterprises), Export Credit, Education, Housing, Social Infrastructure, renewable energy and other priority sectors.

Regional Rural Banks, Small Finance Banks and Cooperative Banks are to lend 75% of their ANBC to Priority Sector. The idea behind this is to ensure that adequate institutional credit reaches some of the vulnerable sector of the economy. The revised guideline will enable better credit penetration to credit deficient area such as small and marginal farmers and other weaker sections along with boost credit to renewable energy and Health Infrastructure. As per the new guideline loans to farmers for installation of solar power plant for solarisation of grid connected agricultural pumps and loan for setting up Compressed Bio Gas plant have been included as fresh categories eligible for finance under  priority sector.

Any shortfall in lending to priority sector by banks shall be contributed by them into Rural Infrastructure Development Fund (RIDF) with NABARD and other funds with NABARD/NHB/SIDBI/MUDRA etc as decided by the RBI.

The revised PSL guidelines will enable better credit penetration to credit deficient areas, increase lending to small and marginal farmers & weaker section and boost credit to renewable energy and heath infrastructure

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