PRIORITY SECTOR

LENDING

PRESENTED BY- SONALI HIREKHAN

(M2018RG020)
 What is priority sector lending?
Lending by a commercial bank for certain sectors which are
identified as “priority sector” by the central bank (Reserve Bank of
India) is called as priority sector lending.
These are sectors of the economy which may not get timely and
adequate credit in the absence of this special dispensation.
This is essentially meant for an all round development of the economy
as opposed to focusing only on the financial sector.
The categories under PSL are-
i)Agriculture (ii) Micro, Small and Medium Enterprises(iii) Export
Credit(iv) Education(v) Housing(vi) Social Infrastructure(vii) Renewable
Energy(viii) Others
How PSL Evolved?
Categories or sectors of economy falling under the “priority sector”, the types of loans to these sectors
that are eligible to be categorized as priority sector loans and the target amount to be lent to each one
of these sectors are given below:

A brief description of the types of loans eligible as priority sector loans Target / Sub-
target under
PSL
AGRICULTURE Farm Credit which will include short, med and long-term crop loans, 18% with 8% as
agriculture Infrastructure ,Loans to distressed farmers, loans under loans to small
KCCS, Loans to corporate farmers, farmers' producer org, firms allied in and marginal
dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture up farmers
to an aggregate limit of ₹ 2 crore per borrower etc.
MSME to Khadi and Village industries, outstanding deposits with Small 7.5%
Industries Development Bank of India (SIDBI) and Micro Units
Development Refinance Agency Bank (MUDRA Ltd.)
EXPORTS loans for export subject to a sanctioned limit of up to ₹ 25 crore per UPTO 2%
borrower to units having turnover of up to ₹ 100 crore

EDUCATION Loans to individuals upto Rs. 10 lakh

SOCIAL Bank credit to Micro Finance Institutions (MFIs) extended for on-lending to
INFRASTUCTU individuals and also to members of Self Help Group (SHGs)/joint Liability
RE Groups (JLGs) for water and sanitation facilities etc.
HOUSING Loans to individuals up to ₹ 28 lakh in metropolitan centres and loans up to ₹ 20
lakh in other centres for purchase/construction of a dwelling unit per family
provided the overall cost of the dwelling unit in the metropolitan centre and at
other centres should not exceed ₹ 35 lakh and ₹ 25 lakh respectively, loans for
repairs to house, bank loans to any governmental agency for construction of
dwelling units or for slum clearance and rehabilitation of slum dwellers subject
to ceiling of ₹ 10 lakh per dwelling unit. etc.
RENEWABLE loans up to a limit of ₹ 15 crore to borrowers for RES and for non-conventional
ENERGY energy based public utilities viz. street lighting systems, and remote village
electrification. For individual households, the loan limit will be ₹ 10 lakh per
borrower.
ADVANCES TO Loans to minorities, women, scheduled caste and scheduled tribes, small and 10%
WEAKER marginal farmers, self help groups, cottage industries etc. Overdrafts upto ₹
SECTIONS 5,000/- under PMJDY accounts, provided the borrower’s household annual
income does not exceed ₹ 100,000/- for rural areas and ₹ 1,60,000/- for non-rural
areas,
OTHERS Loans not exceeding ₹ 50,000/- per borrower provided directly by banks to
individuals and their SHG/JLG, provided the individual borrower’s household
annual income in rural areas does not exceed ₹ 100,000/- and for non-rural areas
it does not exceed ₹ 1,60,000/-, Loans to distressed persons [other than farmers]
not exceeding ₹ 100,000/- per borrower to prepay their debt to non-institutional
lenders etc.
The targets and sub-targets set under priority sector lending for all scheduled
commercial banks operating in India is as –
i) Domestic scheduled commercial banks and Foreign banks with 20 branches
and above –

40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-

Balance Sheet Exposure, whichever is higher.

Foreign banks with 20 branches and above have to achieve the Total Priority
Sector Target within a maximum period of five years starting from April 1,
2013and ending on March 31, 2018 as per the action plans submitted by them
and approved by RBI.

ii) Foreign banks with less than 20 branches-

40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-

Balance Sheet Exposure, whichever is higher; to be achieved in a phased
manner by 2020.
ANBC is the net banking credit after taking into account bill discounting, non-SLR
securities and other exemption via long-term bonds.
It is the net bank credit plus investments made by banks in non-SLR bonds held in the
held-to-maturity category or credit equivalent amount of off-balance-sheet
exposure, whichever is higher.

The Total Priority Sector target of 40 percent for foreign banks with less than 20
branches has to be achieved in a phased manner as under:-
Monitoring and Non Achievement of PSL Targets
In order to ensure continuous flow of credit to priority sectors, the RBI requires the
data on such advances to be furnished on quarterly and annual intervals by banks,
as per the revised reporting formats.
While computing priority sector target achievement from financial year 2016-17
onwards, shortfall / excess lending for each quarter will be monitored separately.
Scheduled Commercial Banks having any shortfall in lending to priority sector shall
be allocated amounts for contribution to the Rural Infrastructure Development Fund
(RIDF) established with NABARD and other Funds with NABARD like NHB/SIDBI/
MUDRA Ltd. , as decided by the Reserve Bank and the interest rates for such
contribution shall be decided by RBI from time to time. Non-achievement of priority
sector targets and sub-targets will be taken into account while granting regulatory
clearances/approvals for various purposes.
 CONSUMER’S PROBLEMS
HOME LOANS-

1. Rejection at first stage

2. Processing fees

With every application form for home loans, banks require about 0.25 per cent to 1 per cent
of the loan amount to be submitted as the processing fees. This processing fees is generally
NOT REFUNDABLE.

3. Desired loan not sanctioned

The loan amount sanctioned is based mostly on repayment capacity of the borrower.

4. The interest rate dilemma

Whether to go for a fixed rate or floating rate interest.

Business loans-
1. Collateral requirements
Most entrepreneurs, given the size and their local presence, are unable to offer
collateral, thus failing to secure the loan needed to expand their businesses.
2. Sanctioning time
the time taken to secure credit for a business can be crucial in determining its profit or
loss. Banks can even take months to approve a business loan.
3. Added risk
In some cases, an urgent need such as a critical repair or replacement can put a dent in
an entrepreneur’s budget.
EDUCATION LOANS-

1. 1. Raising margin money

2. 2. proving the institutions recognisability

3. 3. CIBIL history

4. 4. abroad education

5. MFI -

6. 1. Over-dependency on banking system

7. 2. 80% loans from banks

8. 3. Loans with high interest rates and short term

AGRICULTURE -
1.In farmers have to face the numbers of problems, One them being great
difficulty in getting credit because of the peculiar nature of agricultural credit.
2.The clement of uncertainly is greatest in agriculture as compared to other
sectors because even today a considerably high proportion of Indian agriculture
is dependent on the vagaries of the monsoon.
3.The interference of the middle man in getting the loan. It is higher in commercial
banks compared to co-operative banks.
4.Some banks are giving the preference to big farmers so, small and marginal
farmers are not able to get the high amount, because land size is small, and
repayment capacity is less.
5.The continuous and constant natural calamities, the agricultural production is very
low. So, the repayment capacity of the farmers is very less. Then increase in debt
and default occur.
6.Transaction cost of loan is very high.

RENEWABLE ENERGY RESOURCES-

1. Existing financial structures reveal that India continues to be the most expensive
destination for investment in renewable energy, largely due to the high cost of debt.
2. Studies point that solar projects financed by banks and non-bank financing
companies end up paying an exorbitant interest rate of about 13% .
3.Short debt tenures also further aggravate the debt financing for the renewable energy sec
tor in the country. Debts are available for a short tenure typically for a period up to eight years,
whereas given the life span of most of renewable energy projects, a debt tenure of 12 to 15
years looks more promising.
4.Debt financing also depends on how the equity is financed. If equity investment is not
provided by the developer, but rather is mobilized through third-party investors, such as
private investors and foreign investors, banks are often found to be hesitant to provide the
required debt finance.
5.Given that the renewable energy sector is new, the sector is vulnerable to perceived high
risks (Umamaheswaran and Seth 2015). This emanates largely due to the presence of
information asymmetry within the domestic banking sector about clean energy technological
transformation.
 PROVIDER’s CHALLENGES
Education loans are showing negative growth and defaults are on rise.
On an average the NPAs in the segment are close to 10-15 per cent.
In case of agriculture loan, after poor recovery in case of rabi crop loans, kharif crop loans
are also showing stress. At Kolkata-based United Bank of India, recovery of short-term rabi
assistance has been around 20 per cent lower. Against a recovery of around Rs 700-800 crore,
this year, so far rabi crop loan recovery has been around Rs 550-650 crore. Debt waiver
schemes offered by various state governments are impacting repayment, said bankers.
For most banks, the NPA in the agriculture sector is around 5-6 per cent, much lower than
corporate loans. However, in view of high amount of restructuring, the NPAs are hardly
reflected in books.
Unduly broad based classification of priority sector-
under the existing system, the classification of priority sector advances has remained
broad based, so that even big borrower could avail of the benefits of priority treatment
provided by the banks.

Need to identify priority sector appropriately-

it is necessary to identify appropriate sector within the priority sectors on a rational basis.
So that preferential treatment can be availed by defined and target persons.

Need to examine the viability of project under priority sector-

while granting credit to artisans, cottage industries etc., the bank should examine the
viability of the marketability point of view if not so this loan will pose the problems of
recovery for the banks.

Efficacy-
There is always the problem of ensuring the effective end use of the loans given to the
priority sectors
Banks see a high risk in lending to small and marginal farmers as the chances of recovery are very
low.
There is lack of collateral present as security for the banks.
While giving housing loans the banks consider different aspects like credit history, age, occupation,
repayment schedule, years of working.
While giving education loan banks are sceptical on the recognisability of institutes, job placement
aspects, fake addresses by the applicants.
Banks reluctance towards MSME, renewable energy projects are because of stressed assets and
viability of the businesses.
 How to improve on lending- regulator view
1. We first need to appreciate that different entities have different core competencies.
Logically, a bank should work in an area where it has a clear comparative advantage.
The solution lies in letting the banks that are lending to the priority sector earn a return
commensurate with the risk associated with it, while those opting to stay away from it incur
a cost for the discharge of this social obligation.
2. The banking system as a whole can efficiently (and even profitably) meet its priority-
sector target if discharging the social obligation to all stakeholders in a manner which
utilizes financial and human capital optimally.
3. Banks with a comparative advantage in lending to the priority sector should earn social
credits while those falling short of the target would be required to buy social credits.
Social credits may be used in conjunction with Inter Bank Participation Certificates or
securitization of priority-sector lending portfolio.
A forward market for social credits will help banks to focus and plan better.
4. Introducing flexible products

5. Need for composite financial services.

6. Simplification of procedures to open bank account, access credits.

7. Better staffing policies and door step banking.

8. co-origination arrangement should entailing joint contribution of credit by both lenders

at the facility-level. It should also involve sharing of risks and rewards between the banks
and the NBFCs for ensuring appropriate alignment of respective business objectives as per
their mutual agreement.( RBI STATEMENT)
9. A certain percentage of profit can be exempted from income-tax for those
banks reaching these levels of lending to the priority sector.
10. error of judgment is not negligence- All loans granted by the branch
managers should be viewed from this angle and appropriate protection provided
to the operating staff when loans go bad due to reasons beyond their control.
This will give the required comfort to staff at all levels and radically change their
attitude towards priority-sector lending and help the banks to do a better job in
this area of banking.
 CONCLUSIONS-
Banks are reluctant towards priority sector lending due to competency and
profitability.
Consumers unawareness about the proper choice of loans, debt management.
Uncertainty of the sectors.
High risk investments for both the parties.
Government intervention is inevitable to maintain the balance both in market and
society as well.
Solution can be which helps both-
Banks need to be incentivized as at the end they are market entities and returns are
hence needed.
Consumers should be self regulated by rationalising their use of loan and proper
management of loans.
Government should keep a check and improvise the balance between the two for
overall societal development.
THANK YOU.......