Introduction to Priority Sector Lending (PSL)
The Reserve Bank of India decides to allot funds to predetermined priority sectors of the economy that may require credit and financial assistance, especially in cases where the lack of PSL will lead to the heavy losses to the participants of that sector in some cases. Priority Sectors Lending is the role exercised by the RBI to banks, imploring them to dedicate funds for specific sectors of the economy like agriculture and allied activities, education and housing and food for the poorer population.
Understanding Priority Sector Lending (PSL)
- The goal of a PSL initiative is to provide credit to the weaker sections of the society, as opposed to funding only profitable sectors or spaces that are solely important to economic growth. All sectors considered as a priority are able to easily access financial support like apply for loans that the banks are required to allot at a lower interest rate.
- The following fall into the priority sectors under the policy: agriculture (including micro financing groups like SHGs, JLGs, individual farmers, and other institutions dedicated to individuals working in the sector), micro, small and medium scale enterprises (MSMEs) and SSIs, Educational and Small Scale Industrial loans, Housing loans and other micro credit finances.
- When banks overreach their PSL targets and need additional funding to raise funds for the priority sectors, they are able to issue PSL certificates (PSLCs) only to the extent of the amount banks are allowed to lend in that specific sector. These certificates can be traded on RBI’s e-Kuber platform.
Highlights of Priority Sector Lending (PSL)
- For 2020, the RBI sought channeling funds for the startup sector.
- When introduced, only public sector banks were required to focus on the development of the predetermined priority sectors; though now private and foreign banks are also required to provide adequate care and credit.
- The way PSLCs are traded is similar to the workings of the money market, where issuing these certificates will help banks raise money. Surplus banks may be incentivized in the process, and banks facing cash shortfall may finance their short term needs.
