The government is considering restructuring the priority sector lending (PSL) scheme to allow deposits made by banks in the Rural Infrastructure Development Fund (RIDF) and such other funds to qualify as exposure under PSL.
What are the norms for PSL?
- Reserve Bank of India (RBI) regulations require banks to allocate 40% of their adjusted net bank credit (ANBC) for the priority sector.
- The priority sector comprising agriculture, small and medium enterprises, exports, and economically vulnerable groups such as small farmers, micro-enterprises, and disadvantaged segments.
- At present the deposits banks make in Rural Infrastructure Development Fund (RIDF) are not allowed to compensate for the shortfall in meeting PSL targets.
- Also, such funds are not recognized as part of the banks’ exposure in the corresponding PSL sub-categories.
- These placements, facilitated through institutions such as NABARD, SIDBI, and Mudra are categorized as lending under ancillary services, other finance to MSMEs, and housing.
How the proposed changes will impact banks?
- The proposed changes are expected to provide banks additional flexibility in meeting sector-specific PSL targets.
- It will also free up capital for extending credit to industrially vibrant sectors, fostering economic growth.
- Once the changes are approved, banks’ investments in eligible funds would be aligned with the annual allocation.
- It will be recognized as bank lending within the sub-categories of PSL that correspond to the respective shortfall ratio for that specific year.
- The changes would allow banks more flexibility towards meeting their PSL targets in the event where demand for credit in certain sub-categories is lower.
- According to a Nabard report, PSL shortfall deposits surged to ₹2.52 trillion in March 2022.
- Additionally, there has been a rise in the trading of Priority Sector Lending Certificates (PSLCs) that can be used to cover the shortfall in PSL targets by banks.
- While lending in most PSL sectors has grown in FY23, there has been a decline in export credit and flows for social infrastructure.
SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB