Priority Sector Lending

7th September, 2013

By Mohan Gadgil

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“Priority Sector Lending’ is a unique feature of Indian Banking or rather financing system. In fact, it is the ‘Directed Finance’. Aptly mentioned in the Report of International Finance Corporation on ‘Needs, Gaps & Way Forward-MSME Finance in India’, published in November 2012, “The higher share of bank supply can be attributed to Priority Sector Lending.”

Truly enough, this is a major Public Policy aimed at providing adequate finance to those sectors who provide maximum employment and at the same time are weak and vulnerable . Over the 45 years, [It was in July 1968, PSL was introduced] success of Priority Sector Lending is noteworthy. After nationalization of banks on 20th July 1969, it got boost to finance priority sector in an orderly manner. On the basis of recommendations of Dr. K.S. Krishnamurthy, all banks were advised to achieve the target of priority lending at 40% of aggregate bank advances by 1985 for the first time.

In the year 1972, description of Priority Sector was formalized. For the first time in 1980, the RBI Working Group suggested to rope-in Private Banks also in PSL. The Narasimham Committee, in the Year 1991, recommended focusing on small & marginal farmers, tiny [micro] industry sector, small business & transport operators, village and cottage industries, rural artisans and other weaker sections. The Malegam Committee suggested to revisit PSL guidelines.

On the basis of recommendations of PR Nayak Committee, a special package was devised by RBI, during April 1993, to ensure adequate and timely credit to this sector. The guidelines mainly include eligible borrowers, method of assessment of working capital, operating cycle, borrowers’ margin etc.

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up by Govt. of India to make credit available to small scale industry, without the hassles of collaterals /third party guarantee.

On 25th August 2011, Nair Committee was constituted by RBI to examine the existing classification under PSL and also to suggest revised guidelines with regard to PSL classification and related issues. On 21st Feb. 2012 the Report was submitted by Nair Committee to RBI.

Comments were sought by RBI on Nair Committee Report. COSIA had suggested that alongwith Public and Private Banks, the Foreign Banks also be mandated to provide 40 % of their total ANBC (Adjusted Net Bank Credit)and not 32% to MSEs and other, sectors under PSL. RBI has endorsed COSIA’s suggestion and has issued guidelines to that effect.

The PSL Cover Story provides the up to date RBI Guidelines vis-à-vis statistics for last few years. This will be of interest to our readers.