INTRODUCTION OF PSL IN INDIA
- 1. INTRODUCTION OF PRIORITY SECTOR LENDING IN INDIA SUBMITTED BY:- MEGHA ROY MBA(RM) 3RD SEMESTER
- 2. NEED TO KNOW • The work titled ‘priority sector lending in India’ primarily focuses on understanding the concept of priority sector lending (hereinafter PSL) or directed lending. • It focuses on the informative approach and tries to answer few necessary questions in order to explore the concept of PSL and its presence in Indian governance. • The concept of ‘Priority sector lending’ focuses on the idea of directing the lending of the banks towards few specified sectors and activities in the economy. • The term ‘priority sector’ indicates those activities which have national importance and have been assigned priority for development. These primarily include agriculture, small industries etc. • The case has further been that these sectors and activities were neglected ones for the purpose of bank credit and therefore for the purposes of accessibility of credit, these neglected ones are considered to be at priority for providing credit.
- 3. • The word priority sector was first used by Sri Moraji Desai, the Deputy Prime Minister and Minister of Finance made a statement in the Lok Sabha on December 14 in the year 1967 “that there had been continuous complaints that various priority sectors such as agriculture, small scale industries and exports have not been receiving their due share.” • The Reserve bank of India to provide incentives to banks for lending money to small borrowers under priority sector established the Credit Guarantee Corporation of India Limited in January 1971. • Later under the Banking Laws (Amendments) Bill 1967, which was introduced on December 23, 1967 in the Lok Sabha initiated the social control on banks. • Even during the social control of banks the lending of loans and advances to the agriculture sector did not exceed two percent of the total credit. In the year 1968 National Credit Council was setup assigning it with the responsibility of estimating the demand for bank credit from various sectors of the economy. HISTORY
- 4. HISTORY • The term priority sector lending was first properly defined by the Dr. K.S. Krishnaswamy in the year 1972 when the National Credit Council (NCC) stressed on the commercial banks give importance to these priority sectors. • Before nationalization of banks the NCC was established on February 1968 to monitor the priorities of bank’s credits in various societies of the economy. • The target for priority sector lending was laid down in the year 1974 as 33.33% of total credit of commercial banks. • The reserve bank of India looks into operations of banks to provide loans to neglected and weaker sectors who cannot afford to pay higher rate of interest. • These weaker sectors are known as priority sector and lending loans and advances to these sectors are called priority sector lending.
- 5. UNDERSTANDING PRIORITY SECTOR LENDING • The goal of a PSL initiative is to provide credit to the weaker sections of the society, as opposed to funding only profitable sectors or spaces that are solely important to economic growth. All sectors considered as a priority are able to easily access financial support like apply for loans that the banks are required to allot at a lower interest rate. • The following fall into the priority sectors under the policy: agriculture (including micro financing groups like SHGs, JLGs, individual farmers, and other institutions dedicated to individuals working in the sector), micro, small and medium scale enterprises (MSMEs) and SSIs, Educational and Small Scale Industrial loans, Housing loans and other micro credit finances. • When banks overreach their PSL targets and need additional funding to raise funds for the priority sectors, they are able to issue PSL certificates (PSLCs) only to the extent of the amount banks are allowed to lend in that specific sector. These certificates can be traded on RBI’s e-Kuber platform.
- 6. THE ‘PRIORITY SECTOR’ CATEGORY IN INDIA When PSL was initially formalised in 1972 with the recommendations of the Informal Study Group on Statistics relating to priority sector, it constituted the following categories- ·Agriculture ·Small Scale Industries ·Industrial Estates ·Road and Water transport operators ·Retail Traders ·Professional and self-employed persons ·Education Then, no targets were imposed on the banks for giving loans to the priority sectors and the sectors under priority list were conferred with two benefits; one with regard to the priority in sanctioning of credit and the other in the form of concessions in terms and conditions including rate of interest.
- 7. As per the RBI Circular dated July 7, 2016, eight categories have been identified under the head of priority sector lending which are 1.Agriculture (which includes the sub-categories namely Farm credit, Agriculture Infrastructure and Ancillary activities). 2.Micro, Small and Medium Enterprises 3.Export Credit 4.Education 5.Housing 6.Social Infrastructure 7.Renewable Energy 8.Others THE ‘PRIORITY SECTOR’ CATEGORY IN INDIA
- 8. • The priority sectors have been hit hard due to demonetization. The decline in the growth of loan was experienced by the banking sector. • Loans to micro and small industries fell to 7.4%. Only the construction companies and home loans witnessed loan growth. The loans granted to the priority sector is to ensure that even the credit flow to these sectors of the society. • The reason behind this is that the inflation rates have come, goods and service tax and demonetization of money has made it hard on the banks as well as these sectors. • The loan growth to agriculture in June 2014 was 12% but in June 2017 it is only 5.8%. REASONS FOR THE DECLINE IN THE OVERALL CREDIT GROWTH TO PRIORITY SECTOR
- 9. • Priority sector lending is a crucial and essential services of all the commercial banks to promote and develop the priority sectors who are basically the weaker sectors in the society due to lack of financial support and credit facilities. • The Reserve bank of India being the apex bank analyses the norms framed related to the priority sectors periodically and by the recommendations of the working groups setup for the purpose to examine the negative and positive aspects of the norms and the problems, issues and challenges that sprout to reduce the target rates of these sectors, RBI revises the target and sub targets accordingly. • The priority sectors after the implementation these loans, credit facilities and schemes have been largely benefitted and have witnessed immense growth in their sectors but recently their contribution in the GDPs have declined and as well as the bank’s credit growth on these sectors. • Banking sector is just a small part in the priority sectors decreasing contribution in the country’s GDPs there are various other reasons. The priority sectors scenario has become very pathetic as they have no proper supports form all aspects. CONCLUSION
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