The Reserve Bank of India (RBI) on Monday released a report on redesigning priority sector lending (PSL) norms, which proposes new sectors into the definition of PSL and market to be created for PSL certificates to boost the allocation of credit to these sectors and design the PSL in a manner such that the allocated credit reaches the desired sections.
The Working Group recommends that the target for lending to the redefined priority sector may be retained at 40 per cent of ANBC or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher, for all scheduled commercial banks uniformly. The report also states that all foreign banks may be brought on par with domestic banks and the same targets/sub-targets may be made applicable to them.
The report states that the emphasis of PSL is to be transformed over and above lending to vulnerable sections, is to increase employability, create basic infrastructure and improve competitiveness of the economy, thus creating more jobs. The Working Group pointed out in the report that PSL should focus on giving thrust to areas of national priority as well as inclusive growth. In this backdrop, the Working Group has looked at the following sectors for priority sector status—agriculture, micro, small and medium enterprises (MSMEs), exports, social
infrastructure, renewable energy, educational loans and housing.
Key recommendations of the report state that the current 18 per cent target of Adjusted Net Bank Credit (ANBC) be retained for agriculture with an aim to redefine to include farm credit, agriculture infrastructure and ancillary activities. The Working Group also decided not to put any caps on the loan limits for lending for agri-infrastructure and agri-processing.
For the MSME sector, the Working Group seeks inclusion of medium enterprises with a credit limit up to Rs 10 crore in the PSL category. The Working Group also suggested a sub-categorisation within the definition of micro enterprise outside the purview of MSMED Act 2006. To ensure that MSMEs do not remain small and medium units merely to be eligible for priority sector status, the Working Group recommended that the priority sector lending status may stay with them for up to three years after they grow out of the category of MSMEs.
The Working Group report stated that export finance be added as a priority sector given the importance of exports in the economy. It stated that incremental export credit from a base date to units having turnover of up to Rs100 crore having sanctioned credit limit of up to Rs25 crore from the banking system may be included in priority sector. The export credit under priority sector may have a ceiling of 2 per cent of ANBC in order to ensure that other segments are not crowded out.
On the educational, housing and weaker sections the group suggested the need for continuation of the categories under the PSL umbrella, recommending some minor changes for each regarding the limits. The report emphasised the need for granting PSL status to renewable energy sector loans.
Given the importance of social infrastructure for development and its impact on ultimate credit absorption in rural and urban areas, the Working Group recommended that financing for building infrastructure for certain activities—schools and health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres, with population less than 1 lakh, may be treated as a separate category under priority sector, subject to a ceiling of Rs 5 crore per borrower.
The report emphasised that besides the revision of limits it is necessary that the central bank should improve upon the monitoring and reporting of PSL targets. The Working Group recommended that more frequent monitoring of PSL compliance by banks may be done while on the reporting front the committee recommended that format for PSL may be modified to capture the achievement of banks on the PSL targets/sub-targets.
One of the major recommendations to find mention in the PSL report was introduction of priority sector lending certificates (PSLCs) to enable banks to meet their PSL requirements and allow leveraging of their comparative advantage. The report recommended that a market be created for PSLCs where banks will issue PSLCs that can be purchased at a market determined fee on an electronic platform. PSLCs would count specifically
towards PSL achievement and thus would be sector/sub-sector specific where particular targets have been mandated.
The report stated that the issuer could assess possible credit achievement during the year and issue PSLCs of the estimated surplus. In order to plug loopholes in the process, the report stated that no bank can issue PSLCs of more than 50 per cent of last year’s PSL achievement or excess over the last year’s PSL achievement, whichever is higher.
The report, while making recommendations to revisit the structure of PSL banking also emphasised the need to improve the delivery of the system. As India takes a step closer towards an inclusive growth model it is imperative that the credit markets need to be deeper and more entrenched to support that growth. The report aims at improving the availability of credit and credit delivery systems to the PSL sectors as these can go a long way in assuring that there is adequate flow of resources to those segments of the economy which have higher employment potential and can help in making an impact in terms of poverty alleviation.
(Edited by Joby Puthuparampil Johnson)