Priority Sector Lending in India Revisit
Priority Sector Lending in India Revisit
Priority Sector Lending in India Revisit
Keywords: Priority sector, public sector banks, commercial banks, guidelines of RBI, priority sector
credit
1. Introduction
The banking sector plays a crucial role in the development of a nation’s economy. “The key
players in the development of the economy are commercial banks in general and public
sector banks in particular.” (Mahesha NM, 2018) [5] Bank credit has an enormous role in the
development of the economy. Besides economic growth, it should also lead to the removal of
poverty and equitable distribution of income for that several committees have looked into the
aspect of rural credit and priority sector credit in India. (K. C. Chakrabarty, 2012) [1] In the
same line, new guidelines have been issued by RBI for Priority Sector Lending on September
4, 2020, under the chairmanship of Shri U.K. Sinha & Shri M.K. Jain.
Priority sector refers to those sectors of the economy which are creditworthy and viable in
contributing to the national product of the economy but are handicapped due to lack of
finance on reasonable terms. In other words, those activities which have national importance
and have been assigned priority for development are included in Priority sector. (R.K. Uppal,
2009) [9] Hence, the adoption of the priority sector concept for the purpose of bank lending
reflects the effort to synchronize the lending activities of each bank with the national
priorities.
proprietors and weaker sections of the society, etc. (A. Urban Cooperative Bank (UCB) (Master circular of RBI,
Udhaya Sweetline, 2017) [8] Various changes have been done September 4, 2020)
from time to time according to the financial status of the
economy in priority sector lending. In the same line, 3. Aims and Objectives
Reserve Bank of India has issued the revised guidelines for • To examine the revised guidelines issued by RBI for
Priority Sector Lending as on September 4, 2020, with the Priority Sector Lending
aim to encourage and support environment-friendly lending • To analyze the various problems, facing by Priority
policies to achieve sustainable development goals. It was Sectors.
also recommended by ‘Expert committee on micro, small
and medium enterprises’ under the chairmanship of Shri 4. Current Priority Sector Targets
U.K. Sinha and the ‘Internal working group to review The targets and sub-targets set under Priority Sector
agriculture credit’ under the chairmanship of Shri M.K. Jain. Lending for different commercial banks in India are as
The provisions of these guidelines shall apply to every follows:
commercial bank including Regional Rural Bank (RRB),
Small Finance Bank (SFB), Local Area Bank (LAB), and
Table 1: The Targets and sub-targets set under Priority Sector Lending for commercial banks as per new guidelines
Domestic commercial banks
(excluding RRBs and SFBs) Foreign banks with less than
Categories Regional Rural Banks Small Finance Banks
and foreign banks with 20 20 branches
branches and above
40% of ANBC or CEOBE 75% of ANBC or CEOBE whichever
40 % of Adjusted net bank
whichever is higher out of is higher; However, lending to
Total credit (ANBC) or Credit 75% of ANBC as
which up to 32% can be in the Medium Enterprises, Social
Priority Exposure of off Balance sheet computed or CEOBE
form of lending to exports not Infrastructure and Renewable Energy
Sector Exposure (CEOBE) whichever is higher.
less than 8% can be to any shall be Reckoned for priority sector
whichever is higher
other priority sector achievement only up to 15% of ANBC
18% of ANBC or CEOBE 18% of ANBC or CEOBE
18% of ANBC or CEOBE, whichever
whichever is higher out of whichever out of which a
is higher out of which a target of 10%
Agriculture which a target of 10% is Not applicable target of 10% is prescribed
is prescribed for Small and Marginal
prescribed for Small and for Small and Marginal
Farmers
Marginal Farmers Farmers
Micro 7.5% of ANBC or CEOBE 7.5% of ANBC or CEOBE whichever 7.5% of ANBC or CEOBE
Not Applicable
Enterprises whichever is higher is higher whichever is higher
Weaker 12% of ANBC or CEOBE 15% of ANBC and CEOBE whichever 12% of ANBC or CEOBE
Not applicable
sections whichever is higher is higher whichever is higher
Source: RBI Master circular-priority sector lending-targets and classification, September 4, 2020
In addition to this, these targets will be implemented in a As per the revised guidelines, loans for installation of
phased manner. In Primary Urban Cooperative Bank, the standalone solar agricultural pumps and for solarization of
overall target of Priority Sector lending will be increased grid connected agricultural pumps and loans to farmers for
from 40% to 75% gradually and by March 2024, it will installation of solar power plants on barren /fallow land or in
reach 75%. In the same manner, the Priority sector target for stilt fashion on agriculture land owner farmer has been
marginal farmers and weaker sections will be reached from included in farm credit.
8 % and 10 % to 10 % and 12% respectively by march 2024.
5.1.2 Farm Credit - Corporate Farmers
5. Categories of Priority Sector Advances as per new In this category, farm credit to corporate farmers, farmer
guidelines of 2020 producer organizations, companies of individual farmers,
As per the guidelines of RBI, categories and sub categories partnership firms and cooperatives of farmers engaged in
under Priority sector are furnished below: agriculture and allied activities are included.
As per the revised guidelines, Loans up to ₹5 crore per
5.1 Agriculture borrowing entity to Farm produce organizations /Farm
Since independence, Agriculture has been the main source produce companies are included in this category.
of livelihood in India, more than half of the population is
still engaged in agriculture and it plays a vital role in 5.1.3 Agriculture Infrastructure
generating employment. It also proves crucial in providing As per the revised guidelines, Loans for construction of oil
raw material to Agro-based industries. Because of its due extraction/ processing units for production of bio-fuels, their
importance, it has been categorized under priority sector storage and distribution infrastructure along with loans to
lending, further sub categories are also included there, that entrepreneurs for setting up of Compressed Bio Gas (CBG)
are as follows: plants have been included in this category
have been added to this category. Bank loans to Primary 5.4 Export Credit
Agricultural Credit Societies (PACS), Farmers’ Service Export credit under agriculture and MSMEs will be
Societies (FSS) and Large-sized Adivasi Multi-Purpose classified under their respective categories for Priority
Societies (LAMPS) for on-lending to agriculture. Loans sector lending, other than agriculture and MSMEs, export
sanctioned by banks to MFIs for on-lending to the credit will be allowed to be classified under this head. It will
agriculture sector. Loans sanctioned by banks to registered be 2% of ANBC or CEOBE whichever is higher in case of
NBFCs (other than MFIs) have also been added to this domestic banks and foreign banks (with 20 branches and
category above) and 32% of ANBC and CEOBE whichever is higher
in case of foreign banks with less than 20 branches.
5.1.5 Small and Marginal Farmers As per the new guidelines, Export credit up to 32 percent of
Marginal farmers are the farmers who hold lands up to 1 ANBC or CEOBE whichever is higher is allowed as Priority
hectare and the farmers with a landholding of 1 hectare to 2 sector Lending (in case of Foreign banks with less than 20
hectares are covered under the category of small farmers. It branches)
also includes landless agricultural laborer, tenant farmers,
oral lessees, and sharecroppers 5.7 Housing
As per the revised guidelines, Loans up to ₹2 lakh to As per the new guidelines, bank loans for affordable
individuals solely engaged in Allied activities without any housing projects using at least 50% of Floor area ratio/Floor
accompanying land holding criteria have been added. Space Index for dwelling units with carpet area of not more
than 60 sq. and bank loans to HFCs (approved by NHB for
5.1.6 Lending by Banks to NBFCs and MFIs for on their refinance) for on-lending, up to ₹20 lakh for individual
Lending in Agriculture borrowers, for purchase/construction/ reconstruction of
As per the revised guidelines, this Point is newly added in individual dwelling units or for slum clearance and
Priority Sector Lending i.e., Bank credit extended to rehabilitation of slum dwellers have been added for Priority
registered NBFC-MFIs and other MFIs (Societies, Trusts, Sector Lending in this category.
etc.) which are members of RBI recognized SRO for the
sector, for on-lending to individuals and also to members of 5.8 Social Infrastructure
SHGs / JLGs. (not applicable to RRBs, UCBs, SFBs, and For priority sector lending, setting up of schools, drinking
LABs). Bank credit to registered NBFCs (other than MFIs) water facilities, sanitation facilities including construction/
towards on-lending for ‘Term lending’ component under refurbishment of household toilets and water improvement
agriculture will be allowed up to ₹ 10 lakh per borrower at the household level are included under the category of
social infrastructure.
5.2 Micro, Small and Medium Enterprises (MSMEs) As per the revised guidelines, loans up to a limit of ₹10
Micro Small and Medium Enterprises (MSMEs) are the crores per borrower for building health care facilities
growth engines of the Indian economy, including under ‘Ayushman Bharat’ in Tier II to Tier VI
(https://www.livemint.com/news/india/msmes-the-growth- centers are also added to this category.
engines-of-the-indian-economy 11597923225239.html) as
its contribution is prominent in employment generation, 5.9 Renewable Energy
after agriculture, most of the population of the country is As per the new guidelines, Bank loans up to a limit of ₹30
generating their livelihood from this sector only. Further it crores to borrowers for purposes like solar based power
contributes about 40% of overall exports and 30% of the generators, biomass-based power generators, wind mills,
country’s Gross Domestic Product, due to these micro-hydel plants and for non-conventional energy based
characteristics, it is covered under priority sector. public utilities, viz., street lighting systems and remote
Micro enterprises are those enterprises in which the village electrification etc. will be eligible for priority Sector
investment limit is less than ₹1 crore and turnover is less classification. For individual households, the loan limit will
than ₹5 crore, Small enterprises are those enterprises in be ₹10 lakh per borrower.
which the investment limit is less than ₹10 crore and
turnover is less than ₹50 Crore and Medium enterprises are 5.10 Others
those enterprises in which the investment limit is less than As per the new guidelines, Loans not exceeding ₹1.00 lakh
₹50 crore and turnover limit is ₹250 crore. per borrower provided directly by banks to individuals and
As per the revised guidelines, in other finances to MSMEs, individual members of SHG/JLG provided the individual
Credit outstanding under General Credit Cards (including borrower’s household annual income in rural areas do not
Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit exceed ₹1.00 lakh and for non-rural areas it does not exceed
Card and Weaver’s Card etc. in existence and catering to the ₹1.60 lakh, and loans not exceeding ₹2.00 lakh provided
non-farm entrepreneurial credit needs of individuals) Loans directly by banks to SHG/JLG for activities other than
up to ₹50 crore to Start-ups. MSMEs have also been agriculture or MSME, viz., loans for meeting social needs,
included. construction or repair of house, construction of toilets or any
viable common activity started by the SHGs. And Loans up
5.3 Education to ₹50 crore to Start-ups, that are engaged in activities other
As per new guidelines, Loans to individuals for educational than Agriculture or MSME have been added in this
purposes including vocational courses not exceeding 20 category.
Lakhs will be considered as eligible for priority sector
classification, earlier it was 10 Lakh.
~ 396 ~
International Journal of Applied Research http://www.allresearchjournal.com
The above graph shows the percentage of total NPAs of the increasing NPAs, banks avoid giving loans to priority
Priority sector and the Non-Priority Sector in public sector sectors and this is also one of the problems of priority sector
banks. NPAs in priority sector was 50.89% of total NPAs of lending.
public sector banks and it further increased in 2011 to 53.82
after that, it declined continuously till 2018 and in 2019 8. Conclusion
again it starts rising. Priority Sector lending is the crucial service that is being
NPAs of banks (Priority and Non-Priority sector) increase performed by commercial banks for the sake of the
due to various reasons like ineffective debt recovery system, development of the overall economy. For the development
Government intervention, poor legal framework, etc. Due to of these important sectors, RBI issues dynamic guidelines
~ 397 ~
International Journal of Applied Research http://www.allresearchjournal.com
off and on, in the same series, revised guidelines of RBI Master Directions FIDD.CO.Plan.BC.5/04.09.01/2020-
have been issued on September 4, 2020. The purpose behind 21
the revised PSL guidelines was to do better credit 7. Social Infrastructure and Renewable Energy,
penetration in credit deficient areas. After analyzing these International Education and Research Journal, ISSN
guidelines, it has been concluded that more emphasis has 2454-9916, Volume 3, Issue 3
been given to the weaker section of the society in a phased 8. Sweetline Udhaya A. Priority Sector Lending in India –
manner. Renewable energy Plants have been promoted and An analysis, International Journal of Current Advanced
they will prove beneficial in reducing environmental Research, ISSN 2017;6(11):2319-6475.
degradation and it will further improve the electricity 9. Uppal RK. Priority Sector Advances : Trends, Issues
generation capacity. The goal is development in a and Strategies, Journal of Accounting and Taxation
sustainable way. Due attention has been given to small and 2009;1(5):079-089.
marginal farmers. To protect the interests of marginal and 10. (https://www.livemint.com/news/india/msmes-the-
small farmers, bank credit to NBFCs has been extended. To growth-engines-of-the-indian-economy
generate employment opportunities, funding up to 50 crores 11597923225239.html).
to start-up MSMEs have been introduced, it will improve
the employment condition in rural India as most of the
MSMEs are operated in rural areas. In the education sector,
target funding has been further increased to 20 Lakh. No
significant importance has been given to export however it
plays a vital role in improving the national product of the
economy. Self-help groups and Joint Liability Groups have
been promoted, it will improve the participation of women
in economic activities and it may prove an effective tool
towards reducing poverty. By promotion of joint liability
groups, small and marginal farmers will be benefitted, as
most of the time, they refrain from enjoying their due
benefits. By doing common activities and pooling of their
resources, small and marginal farmers will be encouraged to
work together and will be able to use modern technologies
and it will improve their revenues and will improve the
contribution of agricultural activities in the national product
as well. Revised priority sector guidelines focus more on the
development of agricultural and MSMEs, some limitations
have also been discussed above. Due to rising NPAs and
huge transaction costs, Banks avoid lending to the Priority
sector, due to this they are not able to fulfill their targets and
it is a major area of concern. There is a need to work in this
area. If these problems have been solved then the purpose of
Priority Sector Lending will be solved and it will prove a
game-changer in the overall performance of the Indian
economy.
9. References
1. Chakrabarty KC. Revised Guidelines on Priority Sector
Lending: Rationale and Logic, RBI Monthly Bulletin
2012.
2. Master Circular of RBI. -Priority Sector Lending-
Targets and Classification 2020. RBI/FIDD/2020-21/72
Master Directions FIDD.CO.Plan.BC.5/04.09.01/2020-
21
3. Master Circular of RBI. Priority Sector Lending –
Small Finance Banks – Targets and Classification,
2019.– RBI/FIDD/2019-20/70 Master Direction
FIDD.CO. Plan. BC No.08/04.09.01/2019-20
4. Master Circular of RBI. Priority Sector Lending-
Targets and Classification 2016. RBI/FIDD/2016-17/33
Master Direction FIDD.CO.Plan.1/04.09.01/2016-17
5. NM Mahesha. An Analysis of NPAs In Priority and
Non-Priority Sectors with respect to Public Sector
Banks in India, International Journal of Applied
Research, ISSN 2018,2394-5969.
6. Pillai Dhanyesh Prabhakaran. Revised Priority Sector
Lending Norms 2017. Boost to RBI/FIDD/2020-21/72,
~ 398 ~