Priority Sector Lending (PSL) - RBI Norms & Guidelines

What is meant by Priority Sector Lending?

Priority sector lending include only those sectors as part of the priority sector, that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and Micro and Small enterprises.

Detailed guidelines on Priority sector lending are given in our Master Circular on Priority sector lending no. FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated July 01, 2015.

What are the different categories under priority sector?

Priority Sector includes the following categories:

(i) Agriculture 
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others

What are the Targets and Sub-targets for banks under priority sector?

The targets and sub-targets for banks under priority sector are as follows:
priority sector lending targets

What are the categories under ‘Agriculture’?

The activities covered under Agriculture are classified under three sub-categories viz. Farm credit, Agriculture infrastructure and Ancillary activities.

Whether limits are prescribed for loans sanctioned to Micro, Small and Medium Enterprises to be classified as priority sector?

For classification under priority sector, no limits are prescribed for bank loans sanctioned to Micro, Small and Medium Enterprises engaged in the manufacture or production of goods under any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. The manufacturing enterprises are defined in terms of investment in plant and machinery under MSMED Act, 2006.

Bank loans up to INR 5 crore per unit to Micro and Small Enterprises and INR 10 crore to Medium Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006 are eligible for classification under priority sector.

What is the applicable limit and purpose for social infrastructure loans under priority sector?

Bank loans up to a limit of INR 5 crore per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities (including loans for construction/ refurbishment of toilets and improvement in water facilities in the household) in Tier II to Tier VI centres are eligible for classification under priority sector.

Bank credit to Micro Finance Institutions (MFI) extended for on-lending to individuals/ members of SHGs/ JLGs for water and sanitation facilities is also eligible for classification as priority sector loans under ‘Social Infrastructure’ subject to certain criteria.

What is the applicable limit and purpose for loans for renewable energy under priority sector?

Bank loans up to a limit of INR 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification are eligible to be classified under priority sector loans under ‘Renewable Energy’. For individual households, the loan limit is INR 10 lakh per borrower.

What is the loan limit for education under priority sector?

Loans to individuals for educational purposes including vocational courses upto INR 10 lakh irrespective of the sanctioned amount are eligible for classification under priority sector.

What is the limit for housing loans under priority sector?

Loans to individuals up to INR 28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to INR 20 lakh in other centres for purchase/construction of a dwelling unit per family, are eligible to be considered as priority sector provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed INR 35 lakh and INR 25 lakh, respectively. Housing loans to banks’ own employees are not eligible for classification under priority sector.

What is included under Weaker Sections under priority sector?

Priority sector loans to the following borrowers are eligible to be considered under Weaker Sections category:-

No. Category
1. Small and Marginal Farmers
2. Artisans, village and cottage industries where individual credit limits do not exceed INR 1 lakh
3. Beneficiaries under Government Sponsored Schemes such as National Rural Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
4. Scheduled Castes and Scheduled Tribes
5. Beneficiaries of Differential Rate of Interest (DRI) scheme
6. Self Help Groups
7. Distressed farmers indebted to non-institutional lenders
8. Distressed persons other than farmers, with loan amount not exceeding INR 1 lakh per borrower to prepay their debt to non-institutional lenders
9. Individual women beneficiaries up to INR 1 lakh per borrower
10. Persons with disabilities
11. Overdrafts upto INR 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY) accounts, provided the borrowers’ household annual income does not exceed INR 100,000/- for rural areas and INR 1,60,000/- for non-rural areas
12. Minority communities as may be notified by Government of India from time to time
In States, where one of the minority communities notified is, in fact, in majority, item (12) will cover only the other notified minorities. These States/ Union Territories are Jammu & Kashmir, Punjab, Meghalaya, Mizoram, Nagaland and Lakshadweep.

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

Bank credit to MFIs (NBFC-MFIs, societies, trusts etc.) extended for on-lending to individuals and also to members of SHGs / JLGs is eligible for categorisation as priority sector advance under respective categories viz., Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and Others subject to the criteria laid down in para IX of the Master Circular FIDD.CO.Plan.BC.04/04.09.01/2015-16 dated July 1, 2015 on Priority Sector Lending- Targets and Classification.

What are Priority Sector Lending Certificates (PSLCs)?

Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall. This also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector. Under the PSLC mechanism, the seller sells fulfilment of priority sector obligation and the buyer buys the obligation with no transfer of risk or loan assets.

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

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

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, from time to time. Priority sector guidelines do not lay down any preferential rate of interest for priority sector loans.

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 Circular FIDD.CO.Plan.BC.04/04.09.01/2015-16 dated July 1, 2015 (amended up to December 15, 2015).

What is the effective date of removal of credit cap on MSME (Services) for classification under priority sector?

With regard to Para 3 of FIDD Circular dated March 1, 2018, it is clarified that the banks can reckon the entire outstanding portfolio to MSMEs, engaged in providing or rendering of services as defined in terms of equipment under MSME Act, 2006, under priority sector without any credit cap, from the date of the circular, i.e., March 1, 2018.

Priority Sector Lending Certificates (PSLC)

What is the expiry date of PSLC?

All PSLCs will be valid till March 31st and will expire on April 1st.

Whether PSLCs can be issued for a limited period i.e., for one reporting quarter and multiples thereof?

The duration of the PSLCs will depend on the date of issue with all PSLCs being valid till March 31st and expiring on April 1st.

Whether service tax/ stamp duty/ transaction tax will be applicable while paying fee for PSLC?

PSLCs may be construed in the nature of 'goods', dealing in which has been notified as a permissible activity under section 6(1)(o) of BR Act vide Government of India Notification dated May 4, 2016. The tax implications on account of trading in PSLCs may be determined by the banks in accordance with the applicable tax laws. Further, as per the extant guidelines, no transaction charge/ fees is applicable on the participating banks payable to RBI for usage of the PSLC module on e-Kuber portal.

Whether PSLC – Weaker Sections or PSLC – Export Credit can be traded?

There are only four eligible categories of PSLCs i.e. PSLC General, PSLC Small and Marginal Farmer, PSLC Agriculture & PSLC Micro Enterprises.

Whether Export Credit may form a part of PSLC 'General' and whether banks’ surplus in Export Credit can be sold as PSLC 'General’? Can foreign banks with less than 20 branches reckon PSLC General towards the incremental target for lending to sectors other than exports beyond the overall target of 32 per cent?

'Export Credit' can form a part of underlying assets against the PSLC - General. However, any bank issuing PSLC-General against 'Export Credit' shall ensure that the underlying 'Export Credit' portfolio is also eligible for priority sector classification by domestic banks.

Foreign banks with less than 20 branches are not allowed to reckon PSLC General towards fulfilment of their incremental target for lending to sectors other than exports beyond the overall target of 32 per cent. However, such banks are allowed to reckon PSLC Agriculture, PSLC Micro Enterprises and PSLC SF / MF for the same.

Where can the banks look for market information like prevailing prices, lot size, and historical transactions done by other market participants? Will this information be available in E-Kuber?

The trade summary of PSLC market is available to the participants through the e-Kuber portal. Any new functionality will be notified to the participants via 'News & Announcements' section under e-Kuber portal.

Is secondary market allowed for PSLCs i.e., Sale of surplus at a later point in time post purchase in anticipation of deficit at a prior point of time. Can the purchasing bank re-sell the PSLCs? Will only the net PSLC position be reckoned for ascertaining the underlying asset?

A bank can purchase and issue PSLCs as per its requirements. The net position of PSLCs sold and purchased has to be included while reporting the quarterly and annual priority sector returns. However, with regard to ascertaining the underlying assets, as on March 31st, the bank must have met the priority sector target by way of the sum of outstanding priority sector portfolio and net of PSLCs issued and purchased.

What happens if the RBI inspection team, at a later date, de-classifies a particular PSLC (which has been already traded by the bank as PSLC) ineligible?

The misclassifications, if any, will have to be reduced from the achievement of PSLC seller bank only. There will be no counterparty risk for the PSLC buyer, even if, the underlying asset of the traded PSLC gets misclassified.

While there is no transfer of assets, will there be any impact on the ANBC calculation?

The banks may refer to guidelines related to computation of ANBC for priority sector reporting as advised vide Master Circular on PSL dated July 1, 2015.

The buyer would pay a fee to the seller of the PSLC which will be market determined. Is there any standard/ minimum fee prescribed by the RBI, for purchase of any PSLC?

The premium will be completely market determined. No floor/ ceiling has been prescribed by RBI in this regard.

How the charges/commission shall be paid through E-Kuber portal or separate RTGS is required to be made?

There will be real time settlement of the matched premium and respective current accounts of the participating banks with RBI will be debited/ credited to the extent of matched premium accordingly.

Will there be automatic matching of trades or can the buyer/seller select the counterparty? Will partial matching also happen?

The order matching will be done on anonymous basis through the portal and the buyer/ seller cannot select the counterparty. Partial matching will happen depending on the matching of premium and availability of category wise PSLC lots for sale and purchase.

Disclaimer: Information in the opinion attached is for general informational purposes only. The information presented in the opinion is not a legal advice or opinion in the matter and it may not necessarily reflect the most current legal developments. The market participants should seek the advice of the tax experts/consultants/specialists before acting upon any of the information in the opinion attached.

Source: Reserve Bank of India (RBI)

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