RBI Revises Priority Sector Lending Rules To Widen Credit Spread

For the first time, the regulator has assigned differential weights to districts based on the extent of credit availability.

A solar panel sits atop a roof of a house in India. (Photographer: Anindito Mukherjee/Bloomberg)
A solar panel sits atop a roof of a house in India. (Photographer: Anindito Mukherjee/Bloomberg)

The Reserve Bank of India has altered its approach to priority sector lending, which was first introduced in 1972 as a way to broaden the spread of credit.

For the first time, the regulator has assigned differential weights to districts based on the extent of credit availability, in the hope that lenders will use the incentive to lend more in financially excluded areas.

According to the revised guidelines issued on Friday:

  • A higher weightage of 125% will be assigned to districts where per capita priority sector lending is less than Rs 6,000. There are 184 districts assigned this higher weightage for FY21.

  • A lower weightage of 90% would be assigned to districts where the per capita priority sector lending is above Rs 25,000. These districts are 205 in number.

  • The remaining districts will continue to have 100% weightage.

  • The list of districts provided by the RBI is valid up to FY24 and will be reviewed thereafter.

On Aug. 7, as part of the monetary policy statement, RBI Governor Shaktikanta Das said the priority sector lending guidelines were reviewed “with a view to aligning the guidelines with emerging national priorities and bring sharper focus on inclusive development”.

Back in 2014, a high-level committee headed by Nachiket Mor, a former RBI board member, had recommended that the RBI revise the PSL targets based on a combination of district and sector level credit penetration.

The idea for such a system was also proposed by an internal working group of the RBI that submitted its report in September last year.

To address regional disparities in the flow of priority sector credit at the district level, it has been decided to rank districts on the basis of per capita credit flow to priority sector and build an incentive framework for districts with comparatively lower flow of credit and a dis-incentive framework for districts with comparatively higher flow of priority sector credit.
RBI Revised Priority Sector Lending Guidelines

According to a Sept. 4 report by Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, achieving PSL targets has improved since 2015 but declined to 40.8% in FY20 from 42.6% in FY19.

Banks achieved the overall target of 40% lending in FY20, with state-owned lenders achieving 41.05% of the target, private banks 40.32% and foreign banks 40.81%, the report said.

The incentive framework to address regional disparities, it said, “is an ideal example of policy federalism adopted by the RBI in promoting financial and social inclusion, in line with the central government’s agenda of providing financial inclusion to backward districts in the country”.

Revised Targets for UCBs

The new guidelines also attempt to transition primary urban cooperative banks towards increased priority sector lending.

For this set of banks, the priority sector lending targets will be incrementally increased over the next four years, taking it up to 75% eventually. This is in line with regional rural banks and small finance banks.

Increased Limit For Small Farmers, Weaker Sections

Another change brought in is higher targets for lending to small and marginal farmers and weaker sections.

These will be implemented in a phased manner over the next four years for all lenders, except UCBs, the guidelines said. The target for lending to small and medium farmers will rise from 8% currently to 10% by FY24. For weaker sections, the target will move from 10% to 12%.

The lending target for advances to weaker sections by RRBs will continue to stand at 15% of adjusted net bank credit.

For domestic and foreign banks with more than 20 branches, small finance banks and RRBs, out of their respective total priority sector lending targets for agriculture, 10% has been reserved for small and marginal farmers.

All domestic banks (other than UCBs) and foreign banks with more than 20 branches are directed to ensure that the overall lending to non-corporate farmers does not fall below the system-wide average of the last three years’ achievement which will be separately notified every year
RBI Revised Priority Sector Lending Guidelines

The target for lending to the non-corporate farmers has been set at 12.14% in FY21 and over time banks should reach the level of 13.5%, the RBI said.

Krishnan Sitaraman, senior director at Crisil Ratings, said the guidelines will incentivise credit flow to specific segments like clean energy, weaker sections, health infrastructure and credit deficient geographies. "These measures are also aligned to focus areas of development as per extant policy environment and will support funding requirements in these specific sectors,” he said.

According Deepti George, head of policy at Dvara Research, banks have so far not been able to lend adequately to certain districts where there is low credit-penetration either because of restrictions on sanction limits, prohibitively high cost structures, weak appraisal processes, despite credit demand being there in these districts, which are met by informal or non-bank lenders.

“However, since the RBI has identified districts through per capita PSL credit penetration, this presumes that PSL and non-PSL sectors and credit don’t interact with each other to produce outputs at a district level. While this is a good start, refining the methodology of weights periodically will help to minimise any distortions,” she said.

Over time, it would be better to identify areas through a more holistic methodology which uses credit-to-district GDP, and even credit elasticity as opposed to per capita credit may be a way forward, George said.

Other Highlights

Other changes related to loans that can be classified as priority sector lending include:

  • Higher credit limit up to Rs 5 crore from Rs 2 crore for Farmers Producers Organizations and Farmers Producers Companies that market their produce at a pre-determined price.

  • Loans up to Rs 50 lakh for FPOs and FPCs against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.

  • Higher loan limits of up to Rs 30 crore from Rs 15 crore for renewable energy projects.

  • Credit limit for health infrastructure raised to Rs 10 crore from Rs 5 crore for projects related to Ayushman Bharat Pradhan Mantri Jan Arogya Yojana.

  • Banks can finance start-ups up to Rs 50 crore under priority sector lending, as per Ministry of Commerce and Industry definition.

  • Loans to farmers for installation of solar power plant, solarisation of grid connected agriculture pumps, standalone agriculture pumps and for setting up compressed bio-gas plants to be included as priority sector lending.

  • Bank credit to non-bank lenders, including housing finance companies, for on-lending will be allowed up to an overall limit of 5% of the individual bank’s total PSL.