Priority Sector Lending Norms – Historical trend and Time to realign
Prior to the independence access to the institutional credit through banks was confined to the big business houses and elite class. Post independence particularly late 60s it was realized that if the country has to move toward developing path its masses should grow economically, which led to the concept of mass banking. Nationalization of Banks in 1969 and introduction of Lead bank scheme, Service area approach coupled with rolling out of many centrally sponsored government schemes provided directional push towards upliftment of the large rural and urban poor population.
The Origins of priority sector lending (PSL) can be traced back to 1966 when Late Shri Morarji Desai realised the need for increasing credit to agriculture and small industries later the definition for priority sector was formalised based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972.
The broader principal of PSL policy is to mandates banks to allocate a certain proportion of their loans to critical sectors such as agriculture, education, small and medium industries, housing, export credit, education, social infrastructure and renewable energy ensuring equitable credit distribution to these sectors.
Priority sector classification has undergone many tweaking over the period initially, in 1974, the commercial banks were given a target of 33.33% of their total credit but following the recommendations of Dr K S Krishnaswamy Committee, this target was later revised to 40%. The last detailed study and recommendation on priority sectors was undertaken in 2012 by Nair committee. Post 2012 only minor changes have been made in the priority sector guidelines. Notwithstanding of many changes undertaken in the priority sector lending framework it has remained by and large focused on Agriculture and MSME till today. The current regulation also requires banks to lend nearly 40% and 18% of their adjusted net bank credit (ANBC) to PSL and Agriculture respectively. Over the years, banks have been achieving these target across banks, reflecting its importance in driving socio-economic development particularly in underserved areas.
These targets were set up considering the economic realities and requirement of 80s and 90s but since then path breaking changes have taken place in our economy which calls for transformative changes in the present PSL framework to make it to more relevant to the present economic reality. For instance Agriculture, which once accounted for over 30% of GDP in the 1990s but now contributes barley 14% to 15% to the GDP. Despite this shift, the PSL allocation for agriculture remains unchanged at 18% that too with greater focus on direct agri lending.
The importance of health and education infrastructure has been sharply recognized post covid which calls for the greater channelization of funds to this sector .Currently health is a sub part of the social infrastructure to cover loan up to a limit of Rs. 10 crore per borrower for building health care facilities in Tier II to Tier VI centres. This limit is low for setting up right size of health facility in smaller cities in the light of prevailing market scenario and also there is a need for rethinking for making health as full category instead of sub sector of social infrastructure. Cap of Rs. 5 crore per borrower for Other Social infrastructure viz setting up schools, drinking water facilities and sanitation facilities, including construction/ refurbishment of household toilets, and water improvements at the household level also needs to be revisited in terms of increase in the lending cap. Secondly , there is a dire need to create institutions for training nurses, health technicians, health machine operators, and more broadly for training in basic technology and digital applications.
Climate change has led to the emergence of new concept of green financing which requires huge commitment of allocation of funds .Climate adaptation has taken centre stage at recently held COP29 at the UN global climate summit .The acute problem of Green financing is that of amount of adaptation finance needed vis a vis the levels of currently available sources of funds .The existing limit of Bank loans up to a limit of Rs. 30 crore to borrowers for solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification needs revision considering the quantum of finance required for this sector .Electric vehicles (EVs) are now gaining greater acceptance because of the growing awareness amongst the citizens and across the governments of the countries to reduce the carbon emission of fossil fuel based vehicles so as in turn reduce the impact of the climate change.
Education cost has increased significantly particularly technical and Management education. And growing tendency among the student to pursue higher education which calls for revision of current cap of Rs. Rs. 20 lakh at least for few select colleges/Institutions which are imparting high quality education.
The world has a whole and India in particular is transitioning towards finding technology led solution and innovations which requires greater credit flow to the sectors which are higher growth potential—such as digital infrastructure, and innovative manufacturing.
In addition to the inclusion of few new emerging sector in the PLS framework there is equal requirement for revamping the existing component of PSL to make it more exhaustive like Agriculture and MSME to enhance the threshold for sectors like scientific innovations, adoption of technology ,Research and development .Additionally employment generation opportunity for the sector should also be one of the key criteria for the sector to be eligible for the priority sector lending .The current criteria of 13.5% to direct agri under current framework is makes some times difficult for the banks to achieve in its right spirit in the want of viable and bankable financing opportunity.
The current Agriculture segment is more skewed towards preharvest lending while considering the current volatility of agri commodities due to the geopolitical reasons, regulatory policies and Exim regulation requires revision of the current PSL limit for post harvest loans. Newly proposed Credit Guarantee Scheme for eNWR-based Pledge Financing (CGS-NPF) which aims to promote post-harvest financing options for farmers by creating more secure and transparent agricultural economy can turned out to be effective conduit toward enhancing post harvest finance proportion in the over all Agri lending portfolio.
Although periodically RBI keep revising the limits for the existing sector but for the addition of new sector or industry detailed recommendation of the committee set forth for the purpose is invariably required. Recently many industry forums have echoed the similar voices and have strongly advocated for broadening of PSL priorities to include emerging and high-impact sectors that align with India’s long-term growth ambitions.
Historically the menace of Non performing asset(NPA) has been quite acute in the priority sector domain however in last few years lot of cleansing has taken place across the banks and banks are in their best of their time in terms of their stressed asset portfolio. The Gross NPA and Net NPA as percentage of the total advance portfolio have significantly reduced due to higher provisioning coverage ratio and strong revival cum recovery measures unfolded by the Insolvency and Bankruptcy code(IBC) and Changes in SARFAESI act. This is the right time that appropriate changes are undertaken in the PSL framework to make it more attuned to the current necessity and making the PSL segment more economically viable and financially bankable for banks to fund.
The importance of these changes becomes much more paramount when nation is aiming to achieve its vision of Viksit Bharat 2047, PSL allocations may be key in the evolving priorities of a rapidly changing economy.
By
Abhay Dandwate
Ex Banker and Currently Chief Risk Officer and Head Strategy, National Bulk Handling Corporation
The views expressed are personal in nature
