Saturday, March 14, 2015

Priority Sector Lending

Banks try to do business on those sectors that could generate most profits for them, like corporate sector, etc. There are several other sectors that might not get adequate credit supply (loans), if special dispensation is not provided by RBI (because banks can ignore those sectors, as those will generate less profit for banks).

Therefore, RBI has mandated that all banks need to provide credit to those special category areas, (Financial Inclusion), known as Priority Sector.

Priority Sectors
Priority Sector includes following categories -

1.  Agriculture and Allied Activities (like dairy, fishery, animal husbandry, poultry, etc.)

a.  Direct Finance
  • Without limit - to individual farmers, SHGs, JLGs, small and marginal farmers, distressed farmers indebted to moneylenders, etc.
  • With limit (up to Rs. 2 crore per borrower) - corporates in these activities, producer companies, partnership firms, cooperatives, etc.
b.  Indirect Finance -
  • If the loan limits per borrower is more than Rs. 2 crore, then it will be treated as Indirect Finance.

2.  Micro and Small Enterprises
Bank loans to Micro and Small Manufacturing and Service Enterprises are considered Priority Sector Lending. However, there are some upper limits -

a.  Plant and Machinery Investment -
  • Micro Enterprises - < Rs. 25 lakh
  • Small Enterprises - > Rs. 25 lakh, but < Rs. 5 crore
b. Equipment Investment -
  • Micro Enterprises - < Rs. 10 lakh
  • Small Enterprises - > Rs. 10 lakh, but < Rs. 2 crore

3.  Education
Loans to individuals for educational purposes with the following limits -
  • Education in India - < Rs. 10 lakh
  • Education abroad - < Rs. 20 lakh

4.  Housing
Loans to individuals with the following limits for construction / purchase of a dwelling unit per family, excluding bank's own employees' loans -
  • Metropolitan areas (population above 10 lakh) - Rs. 25 lakh
  • Other than metropolitan areas - Rs. 15 lakh
Note - Bank's own employees get low interest Housing loan from that bank, so loans granted on them is not considered as Priority Sector Lending.

5. Weaker Sections
The following borrowers are considered as Weaker Sections -
  • Small and marginal farmers
  • Artisans,village and cottage industries (max. credit limit Rs. 50,000)
  • Scheduled Castes (SC) and Scheduled Tribes (ST)
  • Beneficiaries of Differential Rate of Interest (DRI) scheme
  • Beneficiaries of some government schemes, like NRLM, SJSRY, SRMS, etc.
  • Self Help Groups (SHG)
  • Distressed farmers indebted to non-institutional lenders
  • Individual women beneficiaries upto Rs. 50,000 per borrower, etc.

6. Micro Credit
Loans upto Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas, either directly or in a group, will constitute micro credit.

PSL targets and sub-targets
The target for lending to the redefined priority sector is retained at 40 % of Adjusted Net Bank Credit (ANBC) or credit equivalent of off-balance sheet exposure, whichever is higher, for all Scheduled Commercial Banks (SCBs).

Target - Total PSL = 40 % of ANBC
  • Sub-target - Total Agriculture = 18 %
  • Sub-target - Advances to Weaker Sections = 10 %

Unused PSL fund to form MUDRA Bank
Unused PSL funds of commercial banks will be used to set up the Rs. 20,000 crore corpus of the proposed MUDRA Bank (read previous post on MUDRA Bank). 

The bank will use at least 65 % of its funds for lending to micro enterprises run by members of Scheduled Castes and Tribes.

New proposals on PSL
  • To enhance credit to Small and marginal farmers, a separate sub-target of upto 8 % 
  • Loans for Agri-processing and Agri-infrastructure would be included in PSL
  • Loans to Medium Enterprises would be included in PSL (Micro and Small Enterprises are currently included)
  • A separate sub-target of 7.5 % to be created for the Micro Enterprises
  • Loans upto Rs. 5 crore for Social infrastructure, like schools, health cares, drinking water, sanitation, etc. are being included under PSL, for towns of less than 1 lakh population
  • Renewable Energy sector is being added to PSL, upto Rs. 10 crore loans

* RBI has released New PSL Norms - Click Me

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