Importance of Priority Sector Lending (PSL) after Covid-19

Importance of Priority Sector Lending (PSL) after Covid-19

This editorial is based on the article “The priority sector lending India needs” published in ‘The Hindustan Times’ dated 30/05/2021. This calls for a restructuring of the credit structure for the social sector. Lets’ discuss the importance of Priority Sector Lending (PSL) after Covid-19.

Reference- Importance of Priority Sector Lending (PSL) after Covid-19

Covid-19 has forced us to re-examine many old policies related to different sectors. Also, has sharply highlighted the importance of health and education infrastructure. One of these sectors is Priority Sector Lending (PSL) ie ‘Priority Sector Lending’.

  • The concept of PSL is related to lending to banks for certain specific sectors and activities in the economy.
  • Banks in India give about 40% of their Adjusted Net Bank Credit (ANBC) i.e. ₹ 39,50,205 as priority sector lending. At present, there is a need to strike a balance between economic development and social development.
  • Therefore, as a concept and practice, public sector debt can be ‘prioritized’ again.

In India priority sector lending: History and Background

  • Inherent Philosophy: The Constitution of India has naturally provided the goals and guidelines for inclusive growth, development through ‘Directive Principles of State Policy’.
  • Moreover, the inclination towards ‘socialist principles’ and ‘socialism’ of governance in India was quite evident in the post-independence era.
  • This explains the underlying philosophy of the need for priority sector lending.
  • Immediate reason: At that time the main primary sector of the economy i.e. agriculture required money, but this was not the intended route for commercial banks. They did not want to provide loans to this sector.
  • Origin: In July 1966, the All India Rural Credit Review Committee recommended that commercial banks should play a complementary role in the expansion of rural credit. This can be seen as the origin of PSL in India.
  • However, the definition of PSL was formalized in the year 1972 on the basis of the Reserve Bank of India (RBI) report in the National Credit Council.
  • An objective: PSL allows commercial banks to generate high social returns along with profits and it also contributes to economic growth by increasing investments in strategic sectors.
  • Regulatory Controls: Reserve Bank of India, which is the supervisory body of the banking sector in India, also known as the apex bank of the country, issues instructions/guidelines regarding PSL to banks in India from time to time.
  • Ingredients: At present, the PSL comprises eight regions. Out of which agriculture is the largest sector receiving 18% of the total adjusted net bank credit. The second important sector is the ‘Ministry of Micro, Small and Medium Enterprises’.
  • Apart from this, five sectors have been classified as PSL — housing, export credit, education, social infrastructure and renewable energy. Apart from this, there are two categories of salt ‘Vulnerable Area’ and ‘Other’.

Issues related to this area

  • Growing Burden of NPAs: Despite the change, till date there has been a greater focus on the agriculture and small scale industries (defined as micro, small and medium enterprises or MSMEs) sector.
  • Banks lending to sectors covered under PSL have double digit non-performing assets (NPAs) in their loan portfolios. Due to this the area has become less economically viable for them.
  • Apart from this, banks have to make separate provision for the provision capital on account of NPAs. This reduces the profitability of the banks.
  • The problem of moral hazard: Lending to this borrower segment with high NPA potential creates opportunities for corruption for the bank managers, thus creating a moral obligation on the borrowers/beneficiaries.
  • Financial burden of banks: PSL forces money from productive sectors to invest in other unproductive sectors. This puts a financial burden on the banks by making separate provision of capital in the form of loan losses and payment defaults.
  • Capping Issues: Educational infrastructure has a very low credit limit, ₹5 crore. In addition, the limit for building hospitals in health, which is a sub-category of social infrastructure, is ₹10 crore.

Way ahead

  • Grants from PSL: The conversion of some part of the PSL into grants paid directly by the government can increase the valuation of public sector banks and also increase efficiency.
  • Leveraging JAM for Social Development: Full use of JAM (Full Access to Jan Dhan Accounts, Universal Aadhar Number and Mobile Access) can solve the issues which the PSL areas cannot solve. For example, JAM can institutionalize the functioning of Direct Benefit Transfer (DBT).
  • Increasing quota of social infrastructure: COVID-19 has forced us to re-examine many things of the past. Therefore, the PSL should be restructured to give priority to the creation of social infrastructure.


The plan for providing priority sector lending (by setting targets and sub-targets) is defined by several aspects (such as the type of bank, the availability of their branches in different regions and the ability of the bank to lend to a particular sector). wish) should be arranged keeping in mind.

Can ‘Priority Sector Lending’ be included again in the ‘Priority’ list to balance between economic growth and social development?


By Team Vlog Bharat



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