Priority Sector Lending: What Borrowers Must Know
- Rashmita Choudhary
- Apr 20
- 10 min read
Updated: 7 days ago
The Reserve Bank of India (RBI) oversees the Priority Sector Loans (PSL) program, which requires banks to direct a portion of their loans to particular economic sectors. Although they frequently lack proper credit, these industries are essential to inclusive economic growth. Microfinance, housing, education, MSMEs (Micro, Small, and Medium Enterprises), and agriculture are a few examples. In this article, we will explain the concept of priority sector lending in detail.
Table of content
What is Priority Sector Lending?
PSL allows underprivileged and vulnerable groups in society to obtain credit at reduced interest rates. The RBI chooses these priority sectors to reduce inequality and encourage the growth of vital industries, which will lead to balanced economic growth. The principal areas of PSL include:
Agriculture and Related Fields: Self-help groups (SHGs), joint liability groups (JLGs), and loans to farmers are all included in agriculture and related activities.
Micro, Small, and Medium-Sized Enterprises (MSMEs): Fostering the expansion and advancement of small businesses.
Education: Provides student loans for postsecondary education both domestically and overseas.
Housing: Loans for individuals constructing or purchasing homes and for affordable housing projects.
Small loans and microfinance: Individuals or small businesses without access to traditional banking systems can obtain credit through microfinance and small loans.
Priority Sector Lending History
Priority Sector Lending's inception dates back to 1966. The government of the time felt compelled to expand lending to small businesses and farmers. However, the Reserve Bank of India (RBI) published a report to the National Credit Council with the definition of the Priority Sector only in 1972. By providing credit through direct lending, the Priority Sector Framework enabled the government to concentrate on certain industries following bank nationalization. The Priority Sector classification has changed throughout time, mostly from agriculture and small businesses (MSME) to several other areas up to this point.
Activities Covered under Priority Sector Lending
Priority sector loans cover the following activities:
Farming
Lending for Agriculture Infrastructure and Ancillary Activities, as well as Farm Credit (Agriculture and Allied Activities), are all part of the lending to the agriculture industry.
Groups of individual farmers and farmer-owned businesses that are directly involved in agriculture and related activities, such as dairy, fisheries, animal husbandry, poultry, beekeeping, and sericulture, are eligible for farm credit, which includes Self Help Groups (SHGs) and Joint Liability Groups (JLGs).
Crop loans cover conventional and non-traditional plantations, horticulture, and related endeavours.
Medium- and long-term loans for farming and related operations, including loans for related activities development and the acquisition of agricultural equipment and tools.
Loans for pre- and post-harvest tasks like transporting, grading, harvesting, and spraying their produce.
Debts owed to non-institutional lenders by struggling farmers.
Financing through the Kisan Credit Card Program.
Lending money to small and marginal farmers so they can buy land for farming.
Loans for 12 months secured by the pledge or hypothecation of agricultural products that includes warehouse receipts.
The limit is Rs. 75 lakh for negotiable warehouse receipts and Rs. 50 lakh for warehouse receipts that do not fall into the aforementioned group.
Loans to farmers for the solarization of grid-connected agricultural pumps and the construction of standalone solar agriculture pumps.
Agricultural Infrastructure
Loans for the building of storage facilities, such as market yards, warehouses, godowns, and silos, as well as cold storage chains and storage units intended to hold agricultural products and produce wherever found.
Preserving soil and developing watersheds.
Agri-biotechnology and plant tissue culture, vermicomposting, seed manufacturing, biopesticides and fertilizers creation.
The total authorized credit limit is Rs 100 crore per borrower through the banking system.
Ancillary activities
Cooperative societies of farmers may receive loans of up to Rs 5 crore to dispose of their members' products.
Agribusiness centres and agriclinics loans for their establishment.
Loans from the banking system for food and agro-processing up to a total sanctioned maximum of Rs 100 crore per borrower.
Large-sized Adivasi Multi-Purpose Societies (LAMPS), Farmers' Service Societies (FSS), and Primary Agricultural Credit Societies (PACS) get bank loans for agricultural on-lending.
If there is a shortage in a priority sector, NABARD has additional qualifying funds.
Marginal and Small Farmers
"Marginal Farmer" refers to farmers who own up to one hectare of land.
Small farmers own more than one hectare, with a limit of up to two hectares of land.
Tenant farmers, sharecroppers, oral lessees, and landless agricultural labourers.
Self-help groups made up of individual small and marginal farmers who work directly in agriculture and related fields are given loans.
Banks are required to keep disaggregated records of these loans.
Loans to individual farmers' producer enterprises and cooperatives of farmers work directly in agriculture and related fields.
In this instance, at least 75% of the members are small and marginal farmers, and their landholding percentage should not be less than 75% of the overall landholding.
MSMEs (micro, small, and medium-sized enterprises)
Micro businesses are those whose turnover is less than five crore rupees, and their investment in plant, machinery, or equipment is less than one crore.
Small businesses are those whose turnover does not exceed fifty crore rupees and whose investment in plant, machinery, or equipment does not exceed ten crore rupees.
Medium-sized business with a budget of no more than fifty crore rupees for plant, machinery, or equipment and a revenue of no more than two hundred and fifty crore rupees.
According to the following criteria, bank loans to micro, small, and medium-sized businesses in the manufacturing and service sectors may categorized as priority sectors:
Manufacturing Businesses
Micro, Small, and Medium-Sized Businesses that produce or manufacture goods for any industry included in the Industries (Development and Regulation) Act, 1951's first schedule.
These industries get identified by the amount of money invested in plants and machinery, and the government occasionally notifies them.
Service-Based Businesses
Micro and small businesses can borrow up to Rs 5 crore per unit from banks, while medium-sized organizations that offer or render services can borrow up to Rs 10 crore.
The MSME Development Act of 2006 defines them in terms of equipment investment.
The sector of Khadi and Village Industries
All loans to businesses in this industry can be categorised under the 7.5% sub-target set for micro-businesses in the priority sector.
Education and Housing
Priority sector designation applies to loans to persons for educational purposes, including vocational courses, up to a maximum of Rs 20 lakh.
Currently, prioritized sector loans would remain in effect until they mature.
In urban areas, housing loans up to Rs 35 lakh are available.
In non-urban areas, up to Rs 25 lakh can be spent for each family's purchase or construction of a home.
The total cost of the apartment should not exceed Rs 45 lakh in the city centre and Rs 30 lakh in other centres.
Excluded are housing loans made to bank personnel.
Repairs to damaged units up to Rs. 10 lakh in metropolitan areas and Rs. 6 lakh in outlying areas addressed by loans up to the total cost of the dwelling unit.
Bank loans to any government organization for building housing units, slum clearance, and slum dweller rehabilitation, provided that the dwelling units have an area of no more than 60 square meters.
Infrastructure for the Society
Loans up to Rs 5 crore per borrower for the construction of schools, sanitary amenities, and drinking water systems.
Water upgrades at the household level and the building or renovation of toilets.
Loans for the construction of medical facilities, including the ones under Ayushman Bharat, in Tier-2 to Tier-6 centres, up to a maximum limit of Rs 10 crore per borrower
The restrictions only apply to UCBs in centres with fewer than one lakh residents.
Subject to specific requirements, bank loans to Micro Finance Institutions (MFI) for on-lending to individuals or members of SHGs or JLGs for water and sanitation infrastructure are also eligible under these categories.
Renewable Energy
Credits of up to Rs 30 crore are available to borrowers for projects including windmills, micro-hydel plants, biomass-based power plants, and solar-based power generators.
Developing public utilities powered by renewable energy, such as electrifying remote villages and installing street lighting systems.
The maximum loan amount for individual families is Rs 10 lakh.
Others
When they meet specific yearly income requirements, banks directly offer loans to individuals and individual members of Self-Help Groups (SHGs) up to Rs 1 lakh per borrower.
Banks give SHGs loans of up to Rs 2 lakh for purposes other than MSME or agriculture, like addressing social needs, building or repairing homes, building toilets, or any other profitable joint venture that the SHGs initiate.
Loans to troubled individuals to settle their debts with non-institutional lenders of Rs 1,00,000 per borrower.
State-sponsored organizations for Scheduled Castes and Scheduled Tribes have been granted loans specifically for inputs and/or marketing of the products produced by these organizations' beneficiaries.
New Priority Sector Lending Guidelines
The Reserve Bank of India (RBI) recently published updated Priority Sector Lending (PSL) guidelines that sharpen the focus on equitable development and align with new national priorities. The most recent reviews of the PSL guidelines were conducted in May 2018 for Urban Co-operative Banks (UCBs) and in April 2015 for commercial banks.
Essential Points
Updated Guidelines:
New Categories: Bank loans for compressed biogas plants, loans to farmers for solar power plants for the solarization of grid-connected agricultural pumps, and bank loans to start-ups up to Rs. 50 crore are added as new categories eligible for financing under the priority sector.
Farmers' Related: Farmers Producers Organizations (FPOs) that engage in farming with guaranteed produce marketing at a set price have a higher credit limit.
A maximum of Rs. 2 crore per borrowing company will apply to loans for these purposes.
The goals for weaker groups and small and marginal farmers will gradually be raised.
Farmers who own less than one hectare of land are marginal, and those who own more than one hectare but less than two hectares are small farmers.
Increasing Credit: The credit limitations for health infrastructure, renewable energy, and "Ayushman Bharat" projects have doubled.
Borrowers can receive bank loans up to Rs. 30 crores for windmills, solar and biomass power generators, non-traditional energy-based public utilities, etc. The maximum loan amount for individual families will be Rs. 10 lakh per borrower.
Bank loans have been permitted for the healthcare facilities, including those under "Ayushman Bharat," in Tier II to Tier VI centers, up to a maximum of Rs. 10 crore per borrower.
Addresses Disparity: At the district level, it aims to solve the following regional discrepancies in the flow of priority sector credit:
Districts get ranked according to the priority sector's per capita credit flow.
Establishing a system of incentives for districts with relatively low credit flows and disincentives for districts with relatively large priority sector credit flows.
In "identified districts," where priority sector credit flow is relatively modest, priority sector credit has a higher weight.
Advantages of Priority Sector Lending
Financial Inclusion: Provides the impoverished section with accessible financing.
Economic Growth: It supports vital industries that are the foundation of India's GDP, such as MSMEs and agriculture.
Equitable Growth: Balanced development lessens regional and income differences.
Innovation Encouragement: The new PSL startups encourage the expansion of entrepreneurship.
Liquidity Management: PSLCs assist banks in improving their cash flow management.
Challenges of Priority Sector Lending
Non-Performing Assets (NPAs): Loan repayment in priority sectors is sometimes complex, which raises NPAs.
Compliance Pressure on Banks: It can be challenging for banks to strike a balance between required credit allocation and profitability.
Misallocation of Resources: Getting money to the right people is still a problem.
Way-forward with Priority Sector Lending
Way-forward with Priority Sector Lending
Encourage the establishment of "small" finance banks and fortify microfinance institutions: MFIs' extensive distribution networks and "last mile connectivity" business strategy might greatly expand the number of loans provided to unbanked rural and semi-urban areas.
Technology Use: For instance, a mobile banking app that approves loans to farmers can lower the cost of credit delivery and expand PSL's reach and effectiveness, particularly in rural and isolated locations.
Establish a strong credit system and tools for risk assessment: Establish a strong credit infrastructure and risk assessment tools to lower the prevalence of non-performing assets (NPAs) and more accurately assess borrowers' creditworthiness.
Conclusion
Farmers and share crop growers typically turn to exploitative non-institutional credit sources as a last resort. Still, priority sector financing has led many to access institutional finance facilities, which would otherwise be challenging. Additionally, it has stimulated the expansion of micro and small businesses, generating new business and encouraging entrepreneurship. There are concerns, meanwhile, about whether lending to specific industries could result in non-performing assets (NPAs) for the banks. It is necessary to face the dilemma of trustworthy credit and circumstances that result in non-performing assets. Legitimate businesses that require credit shouldn't be impacted.
FAQ
Q1. What is the priority sector of lending?
The Reserve Bank of India requires banks to allocate a portion of their loans to targeted industries, including micro and small businesses, agriculture, education, housing, and low-income segments.
Q2. What is Priority Sector Lending in MSME?
Priority sector lending focuses on industries that impact large populations and generate significant employment, such as agriculture, micro-enterprises, and small businesses.
Q3. How is Priority Sector Lending regulated?
The RBI and other regulators set lending targets that banks must meet, ensuring that credit flows to priority sectors.
Q4. What are the priority sectors identified for Priority Sector Lending?
Agriculture, MSMEs, education, housing, renewable energy, and social infrastructure are all priority sectors. These are critical to economic development and require special financial support.
Q5. How does Priority Sector Lending contribute to economic growth?
Priority sector lending drives economic expansion by channeling funds into key industries, creating jobs, boosting productivity, and maintaining financial stability.
Q6. What are the key benefits of Priority Sector Lending for borrowers and banks?
Borrowers gain affordable financing, while banks fulfill regulatory mandates, diversify loan portfolios, and enhance social responsibility.
Q7. Does gold loan come under the priority sector RBI?
No. Bank loans secured by gold jewelry purchased from NBFCs are not eligible for priority sector classification.
Q8. What is the limit of priority sector housing loans?
Loans up to Rs. 35 lakhs in metropolitan areas and Rs. 25 lakhs in non-metropolitan areas qualify as priority sector housing loans.
Q9. How long can MSME enjoy PSL status?
MSMEs retain priority sector loan status for up to three years after exiting the MSME category.
Q10. Who will issue the PSL certificate?
The Reserve Bank of India issues instructions and notifications for Priority Sector Lending Certificates (PSLCs).
Q11. What is the limit of the PSL loan?
The PSL cap for education loans was increased to Rs. 25 lakh per person, and renewable energy project loans now have a borrower limit of Rs. 35 crore.
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