MC Explains: What are RBI norms for priority sector lending for banks?

Banks, except cooperative banks and SFBs, can co-lend with non-banking financial companies (NBFCs) and housing financial companies

Mooted by the then Finance Minister Morarji Desai in 1966, the Reserve Bank of India (RBI) brought in priority sector lending (PSL) norms for banks in 1972 to boost credit access to and development of economically weaker sections.

Under the rules, a banking entity needs to lend 40 percent of the adjusted net bank credit to the so-called priority sector or economically weaker sections such as agriculture, micro-enterprises and other economically disadvantaged sections.

The apex bank’s norms are applicable to all the commercial banks, small finance banks (SFBs), cooperative banks and foreign banks.

But what do these norms mean for banks? And what can happen if banks do not meet the PSL targets? Here’s an explainer.

Firstly, what are the PSL norms for banks?

The PSL norms, which facilitate credit service to economically weaker sections, were brought in by the central bank to promote business and entrepreneurship among those sections.

Sections like agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, renewable energy, etc., are included for lending purposes under PSL.

According to these norms, a set target of 40 percent of the adjusted net bank credit or in simple words, advances, of a banking entity should be made towards the sectors prescribed under PSL.

Other than lending, these norms also prescribe banks to ensure that the loans extended under PSL are for approved purposes and the end use is continuously monitored. For this, banks are advised to put in place a proper internal control system.

For compliance and monitoring purposes, banks are also required to submit data on lending to the RBI’s Financial Inclusion and Development Department.

What happens if the target is not met?

If a bank fails to meet the target prescribed under the PSL norms, it has to deposit the allocated amount for contribution to the Rural Infrastructure Development Fund (RIDF) established with the National Bank for Agriculture and Rural Development as decided by the apex bank from time to time.

The interest rates on banks’ contribution to RIDF or any other funds, tenure of deposits, etc., shall be decided by the RBI from time to time.

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Another thing to look at here is that when the quarterly evaluation of banks’ fund data is done, any shortfall or excess lending for each quarter is monitored separately.

Also, the PSL norms clearly mention that any non-achievement of the prescribed targets under PSL is considered while granting regulatory clearances or any approvals for various purposes.

So, can banks partner with NBFCs for meeting PSL targets?

Yes, banks, except cooperative banks and SFBs, can co-lend with non-banking financial companies (NBFCs) and housing financial companies.

The norms allow co-lending partnerships considering the low cost of banks and wider reach of NBFCs.

“The purpose of co-lending is to improve the flow of credit to the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFCs,” the norms said.

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Which are some of the high and low PSL credit districts?

Data available with the apex bank showed that the South Andaman district of the Andaman and Nicobar Islands, Anantpur, Chittoor and several other districts in Andhra Pradesh, and Papumpare district in Arunachal Pradesh among others are high PSL credit districts.

Nicobar district of the Andaman and Nicobar Islands, Anjaw, Chunglang and several other districts of Arunachal Pradesh, and some districts in Assam and Bihar are among the low PSL credit districts.