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Priority Sector Lending (PSL): meaning, categories and targets
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Priority sector lending (PSL) is the RBI's requirement that banks give a specified part of their loans to sectors that might not get enough credit on purely commercial terms, such as small farmers, micro and small enterprises, housing for low-income groups, education and renewable energy.
Categories that count
According to the RBI's PSL guidelines the main categories are:
- Agriculture
- Micro, small and medium enterprises
- Export credit
- Education
- Housing
- Social infrastructure
- Renewable energy
- Others, such as loans to distressed persons for repaying informal debts
Within the overall target there are sub-targets for agriculture, small and marginal farmers, micro enterprises and weaker sections. The RBI revises the values from time to time, so use its current Master Direction for any figure.
Targets
Domestic commercial banks and foreign banks with a larger branch network have a target of 40% of Adjusted Net Bank Credit (ANBC) or the credit equivalent of off-balance-sheet exposure, whichever is higher. Regional rural banks and small finance banks have a higher target of 75% (RBI PSL Master Direction, rbi.org.in; confirm for changes). That is why regional rural banks and small finance banks are rural and small-business focused.
What if a bank misses the target?
- It can deposit the shortfall in funds such as the Rural Infrastructure Development Fund (RIDF), managed by NABARD, and similar funds with other institutions.
- It can buy Priority Sector Lending Certificates (PSLCs), introduced in April 2016, from banks that have exceeded their targets. PSLCs trade the achievement, not the loan itself. The four types are PSLC-Agriculture, PSLC-Small and Marginal Farmers, PSLC-Micro Enterprises and PSLC-General.
Example
A bank with ANBC of ₹1,00,000 crore must lend ₹40,000 crore to the priority sector at a 40% target. If it has lent ₹43,000 crore, it has an excess of ₹3,000 crore, which it could sell as PSLCs. A bank at ₹36,000 crore would have a shortfall of ₹4,000 crore and buy PSLCs or deposit in RIDF.
How bank exams ask about it
Common stems: "the target for PSL for domestic banks", "which of the following is not a PSL category", "PSLC was introduced in", and "RIDF is managed by". Statement questions also test who the weaker sections are. It is one of the standard items in banking awareness and supports the Kisan Credit Card story.
Frequently asked questions
Who defines the priority sector?
The RBI, through its Master Direction on priority sector lending, applicable to commercial banks, small finance banks and others.
Is a housing loan always a PSL loan?
No, only within the RBI's loan-size limits and for eligible borrowers.
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