The priority sector lending India needs
The priority sector lending (PSL) is a lending requirement administered by the RBI on scheduled commercial banks requiring banks to give a minimum proportion of their loans to sectors of development importance
- The origins of priority sector (PS) lending can be traced back to 1966 when Morarji Desai saw a need for increasing credit to agriculture and small industries.
- The definition for PS was only formalised based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972.
Significance of Priority Sector Lending (PSL) in India
- Instrument to channelize credit: It provides loans at preferential rates to specified sectors of the economy that may not get timely and adequate credit in the absence of such special dispensation.
- Access of credit to vulnerable section: The objective of the PSL is to ensure that the vulnerable sections of the society get access to credit.
- Adequate flow of resources: It aims to provide credit and other resources to those segments of the economy which have higher employment potential and help in making an impact on poverty alleviation.
- Avenue for investment in agriculture sector: It must be acknowledged that agriculture as a priority sector has a special status, a special place other than other activities which also find place in the head of ‘priority sector’ of the country.
- Growth of India’s export sector: The categorization of the export sector as a priority sector is justified on account of the fact that bank credit is a primary source of credit for the sector.
- The credit to the export sector finances various activities of exporters, from researching the profitability of new markets and making market-specific investments in capacity to achieving compliance with regulations.
- Emergence of Micro, Small and Medium Enterprise (MSMEs): The MSME sector accounts for approximately 45 percent of India’s manufacturing output, and 40 percent of exports.
Concerns associated with Priority Sector Lending (PSL) in India
- Growing percentage of non-performing assets: The NPAs have become a big problem for the banks as it has been a major concern for the bank promoters and government.
- It deters banks from expanding their current year’s scale of lending because it would ultimately increase the bank’s PSL target for the next year.
- Reluctance of banks towards MSMEs: Out of the total formal credit to the sector (22 percent), banks accounted for 92 percent of the formal credit supply to the MSME sector.
- It highlights that that the banks are reluctant to lend to small businesses because of size-related risks and limited collateral.
- Similar PSL targets for all type of banks: The requirement of all banks to lend 18 percent of PSL targets to agriculture is not an efficient way to direct credit to agriculture.
- Health sector is a sub-category under PSL: It is shocking that health is only a sub-category of social infrastructure with a ₹10 crore limit for building hospitals.
- Small portion of credit facility for education sector: The educational infrastructure has a low credit limit of ₹5 crore.
Measures to be adopted to redefine Priority Sector Lending (PSL) in India
- Profitability of private banks must be given importance: The private banks should be given a free hand to decide on their investment/lending avenues so that a right balance is struck between pursing profitability and fulfilment of the public functions.
- Reset PSL Targets by Bank Type: Public, private and foreign banks must be assigned targets that conform to their business models to ensure the efficiency of the banking sector is not adversely affected.
- Provide Risk Cover to Agriculture and Make it More Attractive to Private Investors: In the backdrop of a stagnating agrarian economy, it is evident that provision of increased credit supply is necessary, but not sufficient, to improve agricultural production in the country.
- Creating an enabling environment for the sector to attract public and private investments at the grass-root level instead of increased formal bank credit is the key to solving the sector’s productivity issues.
- Use Innovative Market Driven Instruments: It is required to issue Priority Sector Lending Certificates (PSLCs) to a registered lender engages in PSL and gets the PLSCs worth the amount of the PSL loans and allowing for trade of these PLSCs.
- It would provide a platform that would enable deficient banks to purchase these certificates to complete their PSL targets and sub targets and provide the lending institutions with funds to sustain their financial viability.
- Strengthening the roles of specialized lenders: The government needs to strengthen Cooperative Banks, Regional Rural Banks, and Microfinance Institutions by enhancing regulatory oversight.
- It is important to create an enabling environment for encouraging the operations of microfinance institutions and encouraging small banks in rural and semi urban areas that specialize in satisfying the small credit needs of priority sectors.
- Efficient functioning of the banking industry: A well-functioning credit infrastructure facilitates by allowing for widespread collection and maintenance of information on borrower credit history, low cost pledging and enforcement of collateral interests.
- Use Technology to Reduce Cost of Credit Delivery: The usage of technology through ATMSs, mobile and internet banking, to deliver credit rather than branches would save costs for banking institutions.
- Making health sector as a separate category under PSL: It needs to be a large independent category where the lender could encourage “right size” not “small size” hospitals i.e. big in urban centres but smaller outside.
- It is necessary to create institutions for training nurses, health technicians, and health machine operators, and more broadly for training in basic technology and digital applications is dire.
Road ahead
- The resetting of PSL targets for banks based on their underlying business models will certainly enable them to meet their targets efficiently.
- The conversion of some part of PS lending to a grant paid directly by government can unlock large amounts of efficiency in the system, and dramatically increase the valuation of public sector banks also.
- The talk of being India a superpower should wait till the government can offer its people even minimum access to the basic social infrastructure needed for living.
- A strategic re-prioritisation of directed credit to agriculture, exports and micro, small and medium enterprise sectors can moderate the costs of correcting the adverse redistributive effects of inflation.
- It is imperative that the priority sector be redefined more from the objectives of growth and employment and the equity angle be left to be best served through the policy of financial inclusion.
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