Priority Sector Lending: Meaning, Importance, Significance and PSL Norms

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Priority Sector Lending is that kind of lending where the weaker sectors of the economy are helped by providing them with enough credit at the right point in time. The priority sector, as the very name says, stands apart from the rest of the sectors as they are given due importance by the Government of India and the Reserve Bank of India (RBI).

A lot of banking and related schemes with a direct effect on the economy as a whole make it an important topic for the UPSC Exam. That’s why one needs to go through the Priority Sector Lending UPSC Notes for better preparation.

Priority Sector Lending [PSL]

Priority Sector Lending (PSL) is lending to the sectors of an economy that may not get otherwise adequate and timely credit. They may not otherwise be in a position to generate the required funds on their own as well as arrange them from the available sources. The Reserve Bank of India (RBI) requires banks to lend a specific percentage of their capital to particular industries, including renewable energy, micro, export credit, education, small and medium-sized enterprises (MSMEs), housing, and the agricultural sector.

  • The requirement to reserve 40% of their Adjusted Net Bank Credit (ANDC) for financing to certain sectors applies to all scheduled commercial banks as well as international banks with a major presence in India.
  • Cooperative banks, small financing banks, and regional rural banks are required to devote 75% of ANDC to PSL.

Priority Sector Lending serves the basic needs of the people and the development of the country. The word priority in itself indicates that they are given extra importance over other sectors. And to do so, the banks are given the instructions to work for the growth of such sectors by providing them with sufficient credit at the correct point in time.

Evolution of Priority Sector Lending

Priority Sector Lending got initiated way back in 1966 when the agriculture and small industries as important sectors had a demanding need for the credit to be increased as assessed by Morarji Desai being part of the then government. Otherwise, it was a report by the Reserve Bank of India (RBI) as mentioned in the National Credit Council in 1972 that made this priority sectors official and gave them the definition that they hold till now.

  • After the banks got nationalized, the then government had the power to focus on various other sectors that too were in need of funds and this was made possible by direct lending so that they can have the available credit.
  • With this, there came a change in the definition of the priority sector which was not just limited to important groups only anymore but the ones that earlier got neglected too had their share in the economy.

Priority Sector Lending Notes

Different Categories of the Priority Sector

The eight different broad categories under priority sector lending would include the following:

  • Agriculture
  • Micro, Small, and Medium Enterprises (MSMEs)
  • Export Credit
  • Education
  • Housing
  • Social Infrastructure
  • Renewable Energy
  • Others

Priority Sector Lending in Banking

The Reserve Bank of India assigns the task of Priority Sector Lending to the smaller banks by helping the low-income groups and weaker sections to grow and prosper. This will prove beneficial for the overall development of the economy rather than just concentrating on the financial sector. The RBI is the governing authority that releases different classifications and guidelines with the sole intention of making a match between the rising national priorities and comprehensive development by bringing all the stakeholders together.

Under the Priority Sector Lending scheme, the already decided sectors of the economy are allotted funds for their further growth by the RBI with an overview that they are on the lookout for credit and financial assistance. If they are not provided with funds at the correct time, they would incur heavy losses and the very thought of availing of a credit boost seems a little difficult for such sectors.

New Guidelines for Priority Sector Lending

Reserve Bank of India has revised the PSL categories and credit limit. As per the Priority Sector Lending, the new guidelines are:

  • Bank finance to start-ups up to Rs. 50 crore
  • Loans for the installation of compressed biogas plants
  • Loans for farmers for setting up solar power plants.
  • The limit has increased to 10 crores for Health infrastructure,
  • The renewable energy limit has increased to 30 crores
  • Banks can give up to 5 crores of loans for building schools, sanitation, and drinking water facilities.

PSL Features

This initiative by the government believed in providing credit to the weaker sections of society and not just to the priority sectors that are already in a profitable situation adding to the economic growth of the country.

With this implementation, all such sectors get the right to ask for financial assistance in the form of bank loans at a much cheaper rate.

Significance of Priority Sector Lending

With the availability of funds from the bank at a lower interest rate, the number of industries grew specifically and related activities at the ground level saw major changes.

  • This helped the living standards of the rural people and further improved them to a greater extent by putting an end to poverty.
  • With all this in hand, infrastructure saw many developmental changes, and the rural areas got transformed making them the desirable place for the economy and its funding capacity.
  • Agriculture and allied goods saw major growth in production levels as the small and marginal farmers got the increased lending that made it quite simpler for them, which was not possible otherwise.
  • All this was a major boost for the economy as a whole with the right support to gross domestic product making the country flourish and get the profits shared amongst all the sectors in an equal proportion.

Defects of Priority Sector Lending

With the extra funds and easily available credit, Priority sector lending aroused the fear related to non-performing assets being given undesired importance. And that too at a low rate of interest in the form of credits and advances that have strongly impacted the profitability of the banks.

Such transactions were processed at an increased rate making them a disadvantage for the government as well as the related banks in the long run.

Priority Sector Lending UPSC

Priority sector lending topic has a direct effect on the banking industry in India as well as on the economy as a whole. To be fully versed in the topic, candidates can refer to Economics Books. Priority sector lending topic holds weightage in the UPSC Syllabus.

Priority Sector Lending UPSC Question

Question: Priority Sector Lending by banks in India constitutes the lending to:

Our Apps Playstore
SSC and Bank
Other Exams
GradeStack Learning Pvt. Ltd.Windsor IT Park, Tower - A, 2nd Floor, Sector 125, Noida, Uttar Pradesh 201303
Home Practice Test Series Premium