What is priority sector lending in the banking sector?

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Priority sector lending is providing easy, adequate and timely credit to priority sectors that otherwise would not receive easy finance. The scope of priority sectors is confined to sectors that impact huge population segment, weaker sections in the society and sectors that are labour-intensive. Consequently,the sectors covered within the ambit of priority sectors include agriculture, education, export credit, housing, micro and small enterprises (MSME) among others. Under the priority sector lending initiative, banks generally disburse loans of small value to various sectors to aid the development of overall Indian economy.

The interest rate on loans extended under the scheme are in line with the directives issued by the Central bank from time to time i.e. in the present scenario linked to the Base rate of banks.

Priority sector lending targets and sub-targets are set for the banks depending on their domestic or foreign status and scale of operations for benchmarking the execution of priority lending regime. Targets are here-under: Domestic commercial banks or foreign banks with over 20 branches are guided to lend 40% of their total adjusted net bank credit (ANBC) or credit equivalent of Off-Balance Sheet Exposure, whichever is higher to priority sectors. Other commercial banks with foreign base and having total bank branches less than 20 are required to distribute 32% of their total ANBC or credit equivalent of Off-Balance Sheet Exposure, whichever is higher to pre-defined priority sectors.

Also, as a sub-target banks are advised to disburse 18% of their ANBC to agriculture and associated services. For the advances to weaker sections of the society, the target has been set at 10% of the total ANBC.

Penalties levied on banks for non-achievement of Priority Sector Lending targets

Failure to meet the set target for priority sector lending results in levy of penalty for commercial banks In this respect, banks are asked to contribute towards NABARD's Rural Infrastructure Development Fund (RIDF) or funds of other financial institutions as per the specifications of RBI.

Other Sectors under consideration by RBI for Priority Sector Lending

Loans and advances extended to builders of affordable housing project is under consideration by the RBI for inclusion under priority sector lending (PSL). As an anticipated boom in the sector is likely to benefit the overall economy with demand for credit as well as construction material expected to soar. Also, PSL tag for the sector is encouraged on the grounds that the bad or NPA accounts for PSU banks in the housing segment account for less than 2% of the total outstanding loans.


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