Banking Awareness: What is Priority Sector Lending?

Priority Sector Lending is a significant role given by the Reserve Bank of India to other banks to provide a specified portion of the total bank lending to few specified priority sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low- income groups and weaker sections. A major portion of India’s population do not have access to funds which is a big hinderance for their growth and development. Hence, RBI has adopted a Priority Sector Lending norms whereby lending norms are significantly reduced for the underprivileged sections of the society. The provisions of RBI directions with respect to priority lending applies to the following banks:

• All Commercial Banks
• Regional Rural Banks
• Small Finance Banks
• Local Area Banks
• Urban Co-operative Banks

Different Categories Under Priority Sector

The broad categories classified under the priority sector are:

1. Agriculture
2. Micro, Small, and Medium Enterprises
3. Export Credit
4. Education
5. Housing
6. Social Infrastructure
7. Renewable Energy
8. Others

Description of Eligible Categories Under Priority Sector

• Agriculture:

Lending to the agriculture sector includes the following

1. 1. Farm Credit:  

1. It includes short-term crop loans and medium and long-term credit to farmers.
2. The arrangement is made to extend loans to farmers including Self Help Groups (SHGs) and Joint Liability Groups (JLGs), which includes a cluster of individual farmers. Banks shall also maintain transparent data with respect to loans extended to farmers who are engaged in Agriculture and Allied Activities, like, dairy, fishery, animal husbandry, poultry, bee-keeping, and sericulture 
3. Crop loans to farmers, for traditional and non-traditional plantations, horticulture, and, loans for allied activities
4. Medium and long-term loans to farmers for purchase of agricultural implements and machinery, loans for irrigation, and other developmental activities undertaken on the farm
5. Loans to farmers for harvesting activities, like spraying, weeding, harvesting, sorting, grading, and transporting of their own farm produce
6. Loans to farmers up to Rs 50 lakhs against pledge or hypothecation of agricultural produce for a period not exceeding 12 months
7. Loans to farmers under the Kisan Credit Card Scheme
8. Business loans to corporate farmers, farmers' producer organizations, companies of individual farmers, partnership firms, and co-operatives of farmers directly engaged in Agriculture and Allied Activities, up to an aggregate limit of Rs 2 crore per borrower 
9. Loans are extended to farmers for installing Solar Agriculture Pumps for solarisation of agriculture pumps
10. Loans up to ₹5 crores are offered to FPO (Farmer Producer Organisation) for farming and marketing the farm produce at a fixed price

• Agriculture Infrastructure:

The following loans shall be extended to the farmers for setting up infrastructure with a maximum sanctioned limit of Rs 100 crore:

1. Loans for construction of storage facilities including warehouses, market yards, godowns, silos, cold storage units/ cold storage chains designed for storage of agriculture produce.
2. Soil conservation and watershed development.
3. Plant tissue culture, agriculture-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and composting.

• Ancillary Activities:

1. Loans of ₹5 crores to co-operative societies of farmers for purchasing of agriculture produce of the members.
2. Loans up to ₹50 crores to Start-ups, that are engaged in agriculture and allied services, as specified by Ministry of Commerce and Industry, Govt. of India
3. Loans for Food and Agriculture processing up to an aggregate sanctioned limit of ₹100 crores per borrower from the banking system.

• Micro, Small, and Medium Enterprises

The definition of MSMEs will be as notified by the Government of India. These MSMEs should be engaged in the manufacturing or production of goods, as specified in the First Schedule to the Industries (Development and Regulation) Act, 1951.

1. Factoring transactions of the MSMEs that take place through the Trade Receivables Discounting System will also be eligible for classification under the priority sector
2. All loans to units in the KVI (Khadi and Village Industries) sector will be eligible for classification under the sub-target of 7.5 % prescribed for Micro Enterprises under the priority sector
3. Loans up to ₹50 crores to Start-ups, as specified by the Ministry of Commerce and Industry, Govt. of India, abiding by the definition of MSME
4. Loans extended to entities involved in the decentralized sector in the supply of inputs and marketing of output of artisans, and cottage industries
5. Loans extended to the co-operatives of producers engaged in the decentralized sector like artisans, village and cottage industries
6. Loans sanctioned by banks to NBFC-MFI (Micro Finance Institutions) which are members of RBI recognized SRO for the sector for lending to the MSME sector
7. Loans to registered NBFCs (other than MFIs) for on-lending to Micro & Small Enterprises 
8. Overdraft facility extended to account holders of Pradhan Mantri Jan-Dhan Yojana (PMJDY) as per conditions prescribed by the Department of Financial Services, Ministry of Finance, will qualify for lending to Micro Enterprises
9. Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall

• Export Credit

1. Export credit under agriculture and MSME sectors are allowed to be classified as Priority Sector Lending under respective categories
2. Export credit includes pre-shipment and post-shipment export credit facility as defined in Master Circular on Rupee / Foreign Currency Export Credit and Customer Service to Exporters issued by Department of Regulation, RBI

• Education

Loans to individuals for educational purposes, including vocational courses up to ₹ 20 lakh shall be considered as eligible for priority sector classification.

• Housing

1. Loans to individuals up to Rs 35 lakh in metropolitan centres and loans up to Rs 25 lakh in other centres for purchase or construction of a housing unit per family provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs 45 lakh and Rs 30 lakh respectively
2. The housing loans to banks’ own employees are not eligible to be classified under priority sector
3. Loans for repairs to damaged housing units of families up to Rs 2 lakhs
4. Loans extended for housing projects for the purpose of construction of houses for Economically Weaker Sections (EWS) and Low- Income Groups (LIG), the total cost of which does not exceed Rs 10 lakhs per housing unit
5. For the purpose of identifying economically weaker sections and low-income groups of the society, the family income limit is revised to Rs 3 lakhs per annum for EWS and Rs 6 lakh per annum for LIG, in line with criteria specified by the Pradhan Mantri Awas Yojana

• Social Infrastructure

1. Bank loans extended to ₹5 crore per borrower for setting up schools, drinking water facilities, sanitation facilities, construction, refurbishment of household toilets and water improvements at household level, etc
2. The loans up to a limit of ₹10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’
3. Bank loans to MFIs extended for lending to individuals and also to members of SHGs/JLGs for water and sanitation facilities subject to Master Directions

• Renewable Energy

Bank loans up to a limit of Rs 15 crore to borrowers for activities like solar-based power generators, biomass-based power generators, windmills, micro-hydel plants, and for non-conventional energy based public utilities like street lighting systems, and remote village electrification. For individual households, the loan shall be capped at Rs 10 lakhs per borrower.

• Others

The following loans as per the eligibility criteria, qualify for priority sector classification:

1. Loans up to ₹1.00 lakh per borrower extended by the banks to individuals and individual members of Self-Help Groups (SHGs) and Joint Liability Groups (JLGs). Provided on the condition that the individual borrower’s household annual income does not exceed ₹1.00 lakh and for non-rural areas, it does not exceed ₹1.60 lakh
2. Loans up to ₹2.00 lakh provided directly by banks to SHG/JLG for meeting social needs, construction or repair of house, construction of toilets or any common activity started by the SHGs
3. Loans to distressed up to ₹1.00 lakh per borrower to prepay their debts taken from non-institutional lenders
4. Loans sanctioned to State Sponsored Organisations for Scheduled Castes and Scheduled Tribes for purchase and supply of inputs or marketing of the outputs of the beneficiaries of these organisations
5. Loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, engaged in activities other than Agriculture or MSME

Target Specified for Scheduled Commercial Banks for Priority Sectors

Weaker Sections Under the Priority Sector

Priority sector loans to the following category of borrowers are eligible to be classified under Weaker Sections category:

• 1. Small and Marginal farmers
  2. Artisans and cottage industries with individual credit limits not exceeding 0.1 million.
  3. Beneficiaries under Government Sponsored Scheme such as National Rural Livelihood Mission (NRLM), National Urban Livelihood Mission (NULM), and Rehabilitation of Manual Scavengers.
  4. Scheduled Castes ad Scheduled Tribes.
  5. Beneficiaries of Differential Rate of Interest
  6. Self Help Groups (SHG)
  7. Farmers indebted to non-institutional lenders.
  8. Distressed persons other than farmers, with loan amount not exceeding ₹ 0.1 million per borrower to prepay their debt to non-institutional lenders.
  9. Individual women beneficiaries up to ₹ 0.1 million per borrower.
  10. Person with disabilities.
  11. Overdraft limit to PMJDY account holder up to ₹ 10,000/- with age limit of 18-65 years.
  12.  Minority Communities as notified by the Government of India.

Frequently Asked Questions

Q1. Is bank credit to Micro Finance Institutions (MFIs) treated as priority sector lending?

Bank credit extended to MFIs (NBFC-MFIs, societies, trusts, etc) for individuals and members of SHGs/JLGs are eligible to be classified as priority sector lending. Advance under respective categories like Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and Others subject to the criteria laid by the government.

 Q2. What are Priority Sector Lending Certificates (PSLCs)?

Priority Sector Lending Certificates (PSLCs) are a mechanism that enable banks to achieve the priority sector lending targets and sub-targets by purchase of these instruments in the event of shortfall. This allows banks to adjust for their excess achievement over targets and hence enhancing lending to the categories under priority sector. Through this mechanism, the seller abides the fulfilment of priority sector obligation and the buyer buys the obligation with no transfer of risk.

Q3. What are the instructions to Banks with regard to acknowledgement of priority sector loan applications?

Banks should provide acknowledgement of the loan applications received under priority sector loan. A time limit is prescribed by the Bank Board within which the bank communicates its decision in writing to the applicants.

Q4. What is the rate of interest for loans under priority sector?

The rate of interest on bank loans will be as per directives issued by the Department of Banking Regulation of RBI. Priority sector guidelines do not levy any preferential rate of interest for priority sector loans.

Q5. Where are the latest instructions on Priority Sector Lending available?

The latest instructions on Priority Sector Lending – Targets and Classification have been issued vide RBI Master Direction Plan.

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