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Explained: What is Priority Sector Lending by banks and how it benefits MSMEs

Priority Sector Lending Benefits for MSME Sector: To secure credit under PSL, MSMEs are required to register on the government’s Udyam registration platform before they apply for a loan directly with their banks or through the government’s initiatives such as PSB Loan in 59 minutes or Jan Samarth portal.

Priority Sector Lending: Priority sector lending (PSL) in India refers to the mandatory lending targets set by the Reserve Bank of India (RBI) for banks and financial institutions to ensure that certain sectors of the economy receive adequate credit and financial support. The objective of priority sector lending is to promote inclusive growth, reduce regional imbalances, and support marginalized sections of society.

According to the RBI’s Master Direction on PSL updated in October last year, the central bank had identified agriculture, MSMEs, export credit, education, housing, social infrastructure, renewable energy, and others as priority sectors based on their social and economic significance.

Under the PSL guidelines, banks are required to allocate a specified percentage of their total lending to these priority sectors. Currently, for domestic commercial and foreign banks with 20 branches and above, the overall PSL target is set at 40 per cent of their total adjusted net bank credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE). 

ANBC is computed after taking into account bill discounting, non-SLR (statutory liquidity ratio) securities and other exemptions via long-term bonds. Non-SLR securities are debentures, mutual fund units, preference shares, commercial paper, equity shares, etc., issued by a securitisation or reconstruction company. Off-balance sheet exposures include items that are not included on a company’s balance sheet such as letter of guarantee, letter of credit, deferred payment guarantee, etc. 

For regional rural banks and small finance banks, the total PSL target is 75 per cent of ANBC or CEOBE whichever is higher. 

Within the total PSL target, domestic commercial and foreign banks with 20 branches and above, regional rural banks and small finance banks have a target of investing 7.5 per cent of ANBC or CEOBE, whichever is higher, into micro enterprises. 

Banks can meet their PSL obligations by extending loans, providing credit facilities, and offering financial products and services to individuals, entities, and enterprises in the priority sectors. They can also fulfil their targets through investments in eligible instruments such as bonds issued by entities engaged in priority sector activities. 

In case, banks fail to meet their PSL targets, they have to deposit the allocated amount to the Rural Infrastructure Development Fund (RIDF) established with NABARD and to other funds with NABARD, SIDBI, Mudra, National Housing Bank, etc., as decided by the RBI from time to time, according to the RBI’s master direction on PSL.