RBI’s Revised Guidelines for Priority Sector Lending

On September 4, 2020, RBI revised the guidelines for priority sector lending, applicable to all commercial banks including RRBs, Small Finance Banks, Local Area Banks, and Primary (Urban) Cooperative Banks to align it with the emerging needs of the country and bring a sharper focus on inclusive development.

The questions that arise are what is Priority Sector?

Why were the guidelines issued in the first place?

What has changed compared to earlier guidelines?

What can be its impact, if any?

Priority Sector means those sectors which the Government and Reserve Bank of India consider important for the development of the basic needs of the country and are to be given priority over other sectors.

What this means is that RBI and Government push credit to credit-starved sectors for the development of the nation so that there can be better credit penetration to these sectors.

Talking about the earlier guidelines issued, RBI has put majorly 8 categories in Priority Sector, namely, Agriculture, Micro, Small and Medium Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy and Others.

As per RBI guidelines, 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) whichever is higher for Domestic Commercial Banks (excluding RRBs and SFBs) and Foreign Banks, which is 75% of the ANBC or CEOBE whichever is higher for Regional Rural Banks (RRBs) and Small Finance Banks (SFBs).

This is the overall target for the priority sector, but there are some sub-targets to ensure that credit is not focused only on a particular sector out of the 8 sectors put into the Priority Sector.

Agriculture – 18% of the ANBC or CEOBE whichever is higher should be given to agriculture, out of which 8% of ANBC or CEOBE whichever is higher was to be given for Small and Marginal Farmers which is now revised to 10% of ANBC or CEOBE whichever is higher for Small and Marginal Farmers.

Micro Enterprises – 7.5% of ANBC or CEOBE whichever is higher and it has been kept the same.

Advances to Weaker Sections – Earlier it was 10% of ANBC or CEOBE whichever is higher but has now been increased to 12% of ANBC or CEOBE whichever is higher.

Apart from these changes, there have been some other revisions as well:

1. Startups have been included in the priority sector where an amount of up to ₹ 50 crores can be financed i.e., loans up to ₹ 50 crores to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in activities other than Agriculture or MSME.

2. Loans up to ₹ 50 crores to Start-ups, as per definition of the Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.

3. Loans up to ₹ 50 crores to Start-ups, as per the definition of the Ministry of Commerce and Industry, Govt. of India that conforms to the definition of MSME.

4. Loans to farmers for installation of solar power plants for solarization of grid-connected pumps. 

5. Loans for setting up compressed Bio Gas (CBG) plants.

6. For health infrastructure (part of social infrastructure), earlier it was loaned up to ₹ 5 crores for building social infrastructure for activities like school, health care facilities, drinking water facilities, and sanitation facilities, which has now been changed to loan up to ₹ 10 crores for building health care facilities and ₹ 5 crores for setting up schools, drinking water facilities and sanitation facilities.

7. For renewable energy, the loan limit has been increased to ₹ 30 crores from the previous limit of ₹ 15 crores.

So, the limits have been revised, but how are credit-starved districts will be benefitted?

To address this issue, RBI has made adjustments for weights in PSL achievements so that regional disparities in the flow of the priority sector at the district level can be addressed. What this means is that it has been decided to rank districts based on per capita credit flow to the priority sector and build an incentive framework for districts with a comparatively lower flow of credit and a dis-incentive framework for districts with a comparatively higher flow of priority sector credit.

Accordingly, from FY 2021-22 onwards, a higher weight (125%) would be assigned to the incremental priority sector credit in the identified districts where the credit flow is comparatively lower (per capita PSL less than ₹6000), and lower weight (90%) would be assigned for incremental priority sector credit in the identified districts where the credit flow is comparatively higher (per capita PSL greater than ₹25,000).

RBI is all set to put our economy on track by various measures, revising PSL guidelines is one of those steps. These guidelines are to boost credit to various sectors that are credit-starved, and as per RBI’s guidelines, around 184 districts that have low per capita PSL will benefit from this move.

This move is important as it's going to boost rural spending which may help our economy in these hard times where it has contracted to 23.9%.