Priority Sector Advances | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS

Priority Sector Advances

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Applicability

Priority Sector Lending (PSL) norms are applicable to all commercial banks (including foreign banks), Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Urban Cooperative Banks (UCBs). The objective is to ensure that adequate credit is available to the vulnerable sectors of the economy.

Targets/Sub-Targets for Priority Sector

RBI has set the following overall and sub-targets for PSL:

• Total PSL: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher.
• Agriculture: 18% of ANBC, out of which 8% for Small and Marginal Farmers.
• Micro Enterprises: 7.5% of ANBC.
• Weaker Sections: 12% of ANBC.

Mathematical Illustration:
If ANBC of a bank is ₹5000 crore, the targets will be:
- Total PSL: 40% of 5000 = ₹2000 crore
- Agriculture: 18% of 5000 = ₹900 crore
- Small & Marginal Farmers: 8% of 5000 = ₹400 crore
- Micro Enterprises: 7.5% of 5000 = ₹375 crore
- Weaker Sections: 12% of 5000 = ₹600 crore

Categories of Priority Sector

The categories under PSL include:

• Agriculture (Farm credit, Agri-infrastructure, Ancillary activities)
• Micro, Small and Medium Enterprises (MSMEs)
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others (like loans to weaker sections)

Non-Achievement of Priority Sector Targets

Banks that fail to meet PSL targets are required to contribute to the Rural Infrastructure Development Fund (RIDF) maintained by NABARD or other funds as specified by RBI, depending on the shortfall.

Example:
A bank with a shortfall of ₹100 crore in PSL target will need to deposit the same amount in RIDF as per RBI norms.

Common Guidelines for Priority Sector Loans

• Loans should be given as per the eligibility norms defined for each category.
• End-use of funds must be verified.
• Credit limit and margin requirements should comply with RBI instructions.
• Rates of interest should be as per RBI’s interest rate guidelines for PSL.

Other Modes of Lending to Priority Sectors

• On-lending to NBFCs for onward lending to priority sectors.
• Purchase of Priority Sector Lending Certificates (PSLCs).
• Securitised assets under priority sector categories.

Other Aspects Related to Priority Sector Lending

• Monitoring and reporting is mandatory on a quarterly basis.
• Separate disclosures are made in Annual Reports regarding PSL achievement.
• Internal audit must include verification of PSL classification and targets.

Multiple Choice Questions (MCQs)

1. What is the total PSL target for domestic commercial banks as a percentage of ANBC?
a) 18%
b) 25%
c) 40%
d) 50%
Answer: c) 40%

2. Which category does NOT fall under priority sector lending?
a) Housing
b) Export Credit
c) Automobiles
d) Renewable Energy
Answer: c) Automobiles

3. Contribution to which fund is required for non-achievement of PSL targets?
a) CRR
b) RIDF
c) SLR
d) NABCON
Answer: b) RIDF

4. The sub-target for lending to Small and Marginal Farmers is:
a) 12%
b) 10%
c) 8%
d) 18%
Answer: c) 8%

5. What is the sub-target for Micro Enterprises under PSL?
a) 5%
b) 7.5%
c) 6%
d) 10%
Answer: b) 7.5%

6. PSL norms apply to which of the following?
a) Only private banks
b) Foreign banks only
c) Only Public Sector Banks
d) All scheduled commercial banks, RRBs, SFBs, and UCBs
Answer: d) All scheduled commercial banks, RRBs, SFBs, and UCBs

7. Which method is used by banks to meet PSL shortfalls besides RIDF contribution?
a) Buy-back of equity
b) Purchase of PSLCs
c) Issue of bonds
d) Deposits in SLR Answer: b) Purchase of PSLCs

8. What is the sub-target for lending to weaker sections?
a) 6%
b) 10%
c) 12%
d) 18%
Answer: c) 12%

9. Who maintains the RIDF?
a) RBI
b) NABARD
c) SIDBI
d) NHB
Answer: b) NABARD

10. Loans to which of the following are covered under Agriculture PSL?
a) Mining Firms
b) Poultry Farms
c) IT Companies
d) Shipping Companies
Answer: b) Poultry Farms