Priority Sector Advances
Principles & Practices of Banking | Unit C · Chapter 36
Chapter 35 covered retail lending — credit cards, home loans, and personal loans. This chapter covers Priority Sector Lending (PSL) — the RBI-mandated framework that directs bank credit to agriculture, MSMEs, education, housing, and other socially important segments. PSL norms were formalised in 1972; the current Master Directions (September 2020) prescribe eight categories and a tiered target structure across all bank types.
📌 Why This Chapter Matters in JAIIB
Expect 6–8 questions from this chapter. The examiner tests: PSL targets by bank type (40% for domestic SCBs; 75% for RRBs/SFBs; 75% for UCBs from March 2024); sub-targets — Agriculture 18%, Micro Enterprises 7.5%, Weaker Sections 12% (RRBs 15%), SMF sub-target 10%; 8 PSL categories and what falls in each; 11 Weaker Section borrowers; ANBC formula; and district weightage (125% / 100% / 90%).
Key Facts & References — Chapter 36 at a Glance
Introduction, Applicability & PSL Targets
FreePriority Sector Lending (PSL) was formalised in 1972 on the basis of a report by an RBI informal study group (constituted May 1971). In 1980, all commercial banks were advised to achieve a PSL target of 40% of Aggregate Bank Advances by 1985. Sub-targets for agriculture and weaker sections were also prescribed. The current framework — RBI Master Directions on Priority Sector Lending Classification — was issued in September 2020.
36.2 Applicability
PSL norms apply to: Scheduled Commercial Banks (SCBs) including domestic banks and foreign banks, Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks (LABs), and Primary (Urban) Co-operative Banks (UCBs)— other than Salary Earners' Banks.
36.3 Targets & Sub-Targets
| Category | Domestic SCBs & Foreign ≥20 branches | RRBs & SFBs | UCBs |
|---|---|---|---|
| Total PSL | 40% of ANBC or CEOBE | 75% of ANBC or CEOBE | 75% of ANBC or CEOBE (phased from 40% in 2020 → 75% by March 31, 2024) |
| Agriculture | 18% of ANBC or CEOBE | 18% of ANBC or CEOBE | — |
| Small & Marginal Farmers (SMF) | 10% of ANBC or CEOBE (phased) | 10% of ANBC or CEOBE (phased) | — |
| Micro Enterprises | 7.5% of ANBC or CEOBE | 7.5% of ANBC or CEOBE | 7.5% of ANBC or CEOBE |
| Weaker Sections | 12% of ANBC or CEOBE | 15% of ANBC or CEOBE | 12% of ANBC or CEOBE |
| Export Credit | Incremental, up to 2% of ANBC/CEOBE | Not applicable | Not applicable |
UCB Phased Milestones for PSL
SMF & Weaker Sections — Phased Targets
| Financial Year | SMF Target (not UCBs) | Weaker Sections Target |
|---|---|---|
| 2020-21 | 8% | 10% |
| 2021-22 | 9% | 11% |
| 2022-23 onwards | 10% | 12% (RRBs: 15%) |
The 8 Priority Sector Categories (Overview)
FreeThe current PSL framework recognises 8 categories. Memory hook: A-M-E-E-H-S-R-O — Agriculture, MSME, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Others.
(1) Agriculture
- ▸Farm Credit — loans to individuals and entities engaged in agriculture and allied activities.
- ▸Agriculture Infrastructure — sanctioned limit ceiling ₹100 crore per borrower from the banking system.
- ▸Specified deposits with NABARD.
- ▸Lending by banks to NBFCs and MFIs for on-lending in agriculture.
- ▸Small and Marginal Farmers (SMFs) — per specified criteria, including lending to their SHGs.
(2) Micro, Small and Medium Enterprises (MSME)
- ▸All bank loans to MSMEs conforming to specified guidelines.
- ▸Factoring transactions on a 'with recourse' basis where the assignor is an MSME, including through TReDS (Trade Receivables Discounting System).
- ▸Loans to units in the Khadi and Village Industries (KVI) sector.
- ▸Other finance to MSMEs.
(3) Export Credit (Not applicable to RRBs and LABs)
- ▸Export credit under Agriculture and MSME sectors is counted within those respective categories.
- ▸Other export credit: incremental export credit over the corresponding date of the preceding year, up to 2% of ANBC or CEOBE (domestic banks/WoS/SFBs/UCBs).
- ▸Foreign banks with ≥20 branches: 2% of ANBC/CEOBE.
- ▸Foreign banks with <20 branches: export credit up to 32% of ANBC/CEOBE.
- ▸Includes pre-shipment and post-shipment export credit (excluding off-balance-sheet items).
(4) Education
- ▸Loans to individuals for educational purposes including studies in India and abroad.
(5) Housing
- ▸Loans to individuals for purchase/construction/repairs of a dwelling unit.
- ▸Loans for affordable housing projects.
- ▸Loans to any governmental agency for construction of dwelling units or rehabilitation of slum dwellers.
- ▸Loans to Housing Finance Companies (HFCs).
- ▸Outstanding deposits with National Housing Bank (NHB).
Remaining PSL Categories & Weaker Sections
Members Only(6) Social Infrastructure
- ▸Loans for schools, drinking water facilities, and sanitation facilities.
- ▸Credit to Micro Finance Institutions (MFIs) for on-lending for similar social infrastructure purposes.
(7) Renewable Energy
- ▸Loans for solar-based power generators, biomass-based power generators, wind mills, micro-hydel plants, and non-conventional energy-based public utilities.
(8) Others
- ▸Loans to members of Self-Help Groups (SHGs) and Joint Liability Groups (JLGs).
- ▸Loans to State Sponsored Organisations for Scheduled Castes/Scheduled Tribes for purchase/supply of inputs and/or marketing of their outputs.
- ▸Loans to start-ups engaged in activities other than Agriculture or MSME.
- ▸Loans to distressed persons (other than farmers) up to ₹1 lakh per borrower to prepay debt to non-institutional lenders.
36.4.9 Weaker Sections
Priority sector loans to the following 11 borrower types are classified under Weaker Sections (sub-target: 12% of ANBC/CEOBE; for RRBs: 15%):
Special Note — Minority Communities in Majority States
In states where a notified minority community is actually in the majority, item (k) covers only the other notified minorities. These states/UTs are: Jammu & Kashmir, Punjab, Meghalaya, Mizoram, Nagaland, and Lakshadweep.
PMJDY overdrafts availed by account holders, as per limits prescribed by the Department of Financial Services, may also be classified under Weaker Sections.
ANBC Computation, District Weightage & Non-Achievement
Members OnlyAdjusted Net Bank Credit (ANBC) — Formula
* For PSL computation only — banks must NOT deduct provisions, accrued interest, etc. from NBC.
36.3.2 District-wise Weightage for PSL Achievement
To address regional disparities, districts are ranked by per capita credit flow to priority sector. A framework of incentive (higher weight) and disincentive (lower weight) has been built. RRBs, UCBs, LABs, and foreign banks (including WoS) are exempted from this weightage.
| Category of District | Per Capita PSL | Weightage |
|---|---|---|
| Lower flow of credit | < ₹6,000 | 125% — incentive for under-served districts |
| Normal flow of credit | ₹6,000 to ₹25,000 | 100% |
| Higher flow of credit | > ₹25,000 | 90% — disincentive for over-served districts |
36.5 Non-Achievement of PSL Targets
Banks with a shortfall in PSL targets are allocated amounts for mandatory contribution to:
- ✗Rural Infrastructure Development Fund (RIDF) — maintained with NABARD
- ✗Other funds with NABARD / NHB / SIDBI / MUDRA Ltd.
The interest rate on banks' RIDF contribution, tenure of deposits, etc., is fixed by RBI. With effect from March 31, 2021, UCBs (excluding those under all-inclusive directions) are also required to contribute to RIDF on shortfall.
Common Guidelines, Other Modes & Interest Subvention
Members Only36.6 Common Guidelines for PSL Loans
Rate of Interest
As per RBI directions. No separate concessional rate mandated by PSL classification alone — subject to applicable RBI interest rate guidelines.
Service Charges
No administrative charges/service charges to be levied on priority sector loans up to ₹25,000.
Loan Application Register
Date of receipt, sanction/rejection/disbursement with reasons must be recorded and made available to all inspecting agencies.
Acknowledgement of Loan Applications
Acknowledgement must be given for every loan application. The bank's decision must be communicated in writing within the time limit fixed by the Board.
36.7 Other Modes of Lending to Priority Sectors
36.7.1 Investments in Securitised Assets (not applicable to RRBs and UCBs)
- ▸Investments by banks in securitised assets under priority sector (except 'Others' category) are eligible for classification under respective PSL categories.
- ▸Assets must be originated by banks/financial institutions and must fulfil RBI securitisation guidelines.
- ▸Purchase/assignment/investment transactions with NBFCs backed by gold jewellery loans are NOT eligible for PSL status.
- ▸All-inclusive interest charged to the ultimate borrower must not exceed EBLR/MCLR + appropriate spread (MFI-originated assets are exempt from this cap).
36.7.2 Purchase/Assignment of Loan Pools (not applicable to RRBs and UCBs)
- ▸Similar guidelines as for securitised assets apply.
- ▸Banks must report the amount actually disbursed to priority sector borrowers — not the premium-embedded amount paid to the seller.
36.7.3 Inter-Bank Participation Certificates (IBPCs) (not applicable to UCBs)
- ▸IBPCs bought by banks on a risk-sharing basis are eligible for classification under respective PSL categories, provided RBI guidelines on IBPCs are fulfilled.
- ▸IBPCs relating to 'Export Credit' may be classified from the purchasing bank's perspective.
- ▸RRBs may issue IBPCs to Scheduled Commercial Banks in respect of their PSL advances in excess of 75% of their outstanding advances, subject to conditions.
36.7.4 Priority Sector Lending Certificates (PSLCs)
- ▸Outstanding PSLCs bought by banks can be classified under priority sector, provided the underlying assets are originated by banks and comply with RBI's PSLC guidelines.
- ▸PSLCs allow banks with surplus PSL to sell certificates to banks with shortfall — facilitating PSL target compliance without direct lending.
36.7.5 Co-origination Between Banks and NBFCs
- ▸Banks may co-originate loans with NBFCs for lending to priority sector borrowers.
- ▸RBI has issued a framework for co-lending models — both bank and NBFC share credit risk in the co-originated portfolio.
36.8 Interest Subvention Schemes
36.8.1 Crop Loan Interest Subvention
A scheme ensures that farmers receive short-term crop credit at 7% per annum. The subvention covers the difference between the bank's actual rate and 7%. The scheme applies on the principal amount up to ₹3 lakh.
36.8.2 NRLM Interest Subvention
National Rural Livelihood Mission (NRLM) scheme provides interest subvention of the difference between the rate charged and 7% for women Self-Help Groups (SHGs). Details are covered in Unit 39.
Chapter Summary & Flashcards
Members OnlyChapter 36 in 6 Lines
- PSL was formalised in 1972; the 40% target was mandated in 1980; current Master Directions were issued in September 2020.
- Targets: Domestic SCBs = 40% ANBC; RRBs and SFBs = 75% ANBC; UCBs = 75% ANBC (phased to 75% by March 2024). Sub-targets: Agriculture 18%, Micro Enterprises 7.5%, Weaker Sections 12% (RRBs 15%), SMF 10%.
- There are 8 PSL categories: Agriculture, MSME, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Others (A-M-E-E-H-S-R-O).
- Weaker Sections include 11 borrower types — SMFs, artisans, SHGs, SCs/STs, DRI beneficiaries, NRLM/NULM beneficiaries, distressed farmers, women borrowers, disabled persons, minority communities, and PMJDY OD holders.
- District weightage for PSL: per capita PSL below ₹6,000 → 125%; ₹6,000–25,000 → 100%; above ₹25,000 → 90%. Shortfall means mandatory contribution to RIDF/NHB/SIDBI/MUDRA.
- Other modes: securitised assets, loan pools, IBPCs, PSLCs, co-origination with NBFCs. Crop loan subvention: 7% rate, principal up to ₹3 lakh.
Flashcards — Chapter 36
1. When was Priority Sector Lending formalised in India?▼
2. When was the 40% PSL target mandated for all commercial banks?▼
3. What is the current PSL target for domestic Scheduled Commercial Banks?▼
4. What is the PSL target for RRBs and Small Finance Banks?▼
5. What is the PSL target for Urban Co-operative Banks from March 31, 2024?▼
6. What is the Agriculture sub-target for PSL?▼
7. What is the Micro Enterprises sub-target under PSL?▼
8. What is the Weaker Sections sub-target?▼
9. Name the 8 categories of Priority Sector.▼
10. What does TReDS stand for and under which PSL category does it fall?▼
11. What is the ceiling on Agriculture Infrastructure loans per borrower under PSL?▼
12. What is the district weightage for districts with per capita PSL below ₹6,000?▼
13. What is the district weightage for districts with per capita PSL above ₹25,000?▼
14. Which bank types are exempt from the district-level PSL weightage framework?▼
15. What happens if a bank fails to meet PSL targets?▼
16. Name any 5 borrower categories under Weaker Sections.▼
17. What is ANBC and what does it stand for?▼
18. Are IBPCs bought by banks eligible for PSL classification?▼
19. What are PSLCs and how do they help banks meet PSL targets?▼
20. What is the interest rate and principal limit under the Crop Loan Interest Subvention Scheme?▼
Practice Test Available
Chapter 36 Mock Test — 50 Questions
Test your knowledge with 50 exam-standard MCQs on Priority Sector Advances — PSL targets, 8 categories, ANBC formula, district weightage, Weaker Sections, PSLCs, and interest subvention. Timed, graded, PRO.
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