Priority Sector Lending Study Notes: Check here the study material PSL

By BYJU'S Exam Prep

Updated on: September 25th, 2023

Priority Sector Lending Study Notes: Priority Sectors are those sectors which Central Government of India and Reserve Bank of India consider as important for the development of the basic needs of the country. To Know more read the full article.

Priority Sectors are those sectors which the Central Government of India and the Reserve Bank of India consider as important for the development of the basic needs of the country. They are to be given priority over other sectors.

Banks are mandated to encourage the growth of Priority sectors with adequate and timely credit.

Priority Sector Lending refers to lending credits to those sectors which form the base of the economy which may not get timely and adequate credit in the absence of this special dispensation.

Categories Included In Priority Sector

Priority Sector includes the following categories:

  1. Agriculture
  2. Micro, Small and Medium Enterprises
  3. Export Credit
  4. Education
  5. Housing
  6. Social Infrastructure
  7. Renewable Energy
  8. Others (weaker sections such as ST, SC, differently-abled and women).

As part of their role in the economic growth, the Reserve Bank of India directed all the commercial banks to provide some percentage of their adjusted net credit as loans to priority sectors.

What is Priority sector lending (PSL)?

Lending (to provide loans or funds) by commercial banks of the country to the priority sectors is known as ‘priority sector lending.

The objective of priority sector lending (PSL) is to contribute adequate credit and fund flow into some sectors of the economy which are not productive from the perspective of profit-making.

The Reserve Bank of India (RBI) was the first to issue guidelines under the priority sector lending scheme in India. The main purpose of this scheme was to see that timely and sufficient credits (loans) are given (provided) to the priority sector.

Earlier, only public sector banks were asked to give loans to this sector. However, now even private and foreign banks come under the scheme and have to give loans to this sector.

There is a famous quote of Amartya Sen – “Economic growth without investment in human development is unsustainable and unethical.”

Background of PSL

It came into being in 1972, following the National Credit Council’s plea that more emphasis should be given by commercial banks to the priority sector.

In 1974, the commercial banks were given a target of 33.33% of total credit which was revised to 40 % of the total credit under the recommendations of Dr K S Krishanaswamy Committee. The last revision took place in 2012 under the recommendations of the M.V. Nair Committee.

According to the RBI norms for PSL, scheduled commercial banks have to give 40% of their loans calculated in terms of Adjusted Net Bank Credit or ANBC to the identified priority sectors.

The regulations set by the RBI for these PSLs are modified periodically by setting limits for sub-sectors and other qualifications for the beneficiary groups.

If in case the bank is unable to meet the targets then it will have to finance the development programmes run by the government for the particular sectors.

In April 2016, RBI has introduced Priority Sector Lending Certificates so that banks can trade the loan certificates given to the different sectors to meet their targets in the event of a shortfall.

Priority Sector Lending Certificates (PSLCs)

A mechanism to enable banks to achieve the priority sector lending target and sub-targets by the purchase of these instruments in the event of the shortfall is Priority Sector Lending Certificates (PSLCs). This also incentives surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector.

Targets and sub-targets for banks under priority sector

The cases given below is for Domestic scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) and Foreign banks with 20 branches and above

  • Total Priority Sector: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
  • Agriculture sector: 18% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
  • Micro Enterprises: 7.5% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.
  • Advances to Weaker Sections: 10% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher
  • The loan limit for education under priority sector: Loans to individuals for educational purposes including vocational courses up to Rs.10 lakh for studies in India and Rs. 20 lakh for studies abroad are included under the priority sector.
  • Limit for housing loans under priority sector: The housing loan limits for Priority Sector Lending eligibility is Rs. 35 lakh rupees in metropolitan and Rs. 25 lakh rupees in other centres. (same in case for RRBs & Small Finance Banks).
  • Limit of loan that can be availed by individual women under PSL: Individual women, beneficiaries can take up to ₹ 1 lakh per borrow
  • Foreign banks are required to lend 10% of their NBC to the small-scale industries and 12% of their NBC for export credit.

Priority Sectors

The main areas under the priority sector lending scheme are as follows:

1. Agricultural sector: Nearly one-third of the Indian population is dependent on the agricultural sector for national income. The economic and social development depends on the expansion of this sector. Therefore, it comes under the category of priority sector.


The loans for this sector is divided into two categories:

  • Direct agricultural Loans: Under this section, the loans are given in the name of tractor loan or dairy loan etc. These loans are given either for a short-term period (upto 12 months) or for a medium and long-term period (up to 36 months).
  • Indirect agricultural Loans: Under this section, loans are given for cattle feed, for setting up warehouses, for buying seeds, pesticides, subscription of bonds issued by NABARD etc. These loans are made available to the farmers at much concessional interest rates.

2. Micro, Small and Medium Enterprises: Small scale industries comprise units involved in manufacturing, processing and preservation of goods. Such small-scale industries are responsible for creating new job opportunities. The investment made in fixed assets by these industries should not exceed the limit set by the GoI. Small business, where the cost of equipment used for business does not to exceed 20 lakh rupees.

Small road and water transport operators – Under this category, the loan is made available to the owners of different types of public transport vehicles. This loan is purposed to purchase vehicles, spare parts, carry out repairs etc. The loan limit is set for owning up to 10 vehicles.

Professional and self-employed – Under this category loans are made available to various professionals like Doctors, Architects, Engineers and other self-employed professionals etc. The borrowing limit is an aggregate of fixed capital and working capital requirements of a professional and self-employed person. Loan with the borrowing limit up to 10 lakh rupees, with many terms and conditions, are given under this category.


3. Export Credit: Loans for export subject to a sanctioned limit of up to ₹ 25 crore per borrower to units having turnover of up to ₹ 100 crore upto 2%.


4. Social infrastructure: Bank loans up to a limit of ₹ 5 crores per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and household level water improvements in Tier II to Tier VI centres.


 5. Retail trade loan: This category involves all retail traders that trade in fertilizers, mineral oil and consumers’ co-operative stores. The loan amount is used in carrying out fixed assets purchases and its allied activities. Loans up to rupees 10 lakh are disbursed under this category.


6. Educational loan: Under this PSL category, loans are made available to students who wish to pursue higher education in India or abroad. The loans and advances are granted to only individuals for educational purposes up to Rs.10 lakh for studies in India and Rs. 20 lakh for studies abroad.


7. Housing loan: Under this category, the loans are made available for construction of houses, repair or renewal of house or in case of rehabilitation of disaster-stricken masses to the temporary refuge.


8. Others: Consumption loan is provided to weaker sections of the society including small farmers, landless agricultural workers or individuals with no savings to carry out non-productive purposes such as marriage, festivals etc. The loan limit for such loans is prescribed for each family.

State-sponsored corporations for SC/ST: Under this category of PSL, loans are given to state-sponsored corporations for the promotion of scheduled castes (SC) and scheduled tribes (ST).

New Updates

Reserve Bank of India (RBI) has brought ‘startups’ under the purview of priority sector lending (PSL), a move that will make it easier for startups to raise funds from banks. This step is a huge booster as sufficient funding and user adoption are two primary challenges for Indian entrepreneurs. will help startups free up their equity and raise low-cost debt.

Priority Sector Lending Quiz


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