Priority Sector Lending

Priority Sector refers to those sectors which the Government of India and the Reserve Bank of India consider as important for the development of the basic needs of the country. They are assigned priority over other sectors. The banks are mandated to encourage the growth of such sectors with adequate and timely credit.

The Priority Sector Lending classifications and guidelines released by the RBI  are intended to align with emerging national priorities and bring a sharper focus on inclusive development, building a consensus among all stakeholders.

It enables better credit penetration to credit deficient areas, increases lending to small and marginal farmers and weaker sections, boosts credit to renewable energy, and health infrastructure and allied sectors that need credit boost, which is otherwise difficult to avail.

Priority Sector Lending In the News

With the government providing the necessary impetus to green mobility, the Electric Vehicle (EV) sector is expected to see a boom. To enable credit facilities and promote faster adoption of the technology, institutional policies and mechanisms are formulated.

In recent times, the Reserve Bank of India is said to be considering a proposal from the government’s policy think tank NITI Aayog to categorize loans to purchase electric vehicles under the priority sector lending segment. 

This is important from the UPSC perspective also. In this article, we shall be discussing various aspects of the importance of the topic. Further, this article covers other important dimensions, keeping in mind the demands of the preliminary as well as the mains examination of the UPSC IAS Exam.

What are the Different Categories of the Priority Sector?

• Agriculture
• Micro, Small and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others

Priority Sector Lending History

• The origins of Priority Sector Lending can be traced back to 1966.
• The then government felt the need to increase credit to agriculture and small industries. 
• However, the definition of the Priority Sector was only formalized based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972. 
• After bank nationalization, the Priority Sector formulation also allowed the government to focus on different sectors by making credit available, through direct lending.
• Over the years the classification of the Priority Sector has evolved primarily from agriculture and small industries (MSME) to various other domains till today.

What are the Weaker Sections under the Priority Sector?

Priority sector loans to the following borrowers are treated under the Weaker Sections category

• Small and Marginal Farmers.
• Artisans, village and cottage industries where individual credit limits do not exceed Rs 1 lakh.
• Beneficiaries under Government Sponsored Schemes such as the National Rural Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
• Scheduled Castes and Scheduled Tribes.
• Beneficiaries of the Differential Rate of Interest (DRI) scheme. 
• Self-Help Groups.
• Distressed farmers are indebted to non-institutional lenders.
• Distressed persons other than farmers, with loan amounts not exceeding Rs 1 lakh per borrower to prepay their debt to non-institutional lenders.
• Individual women beneficiaries up to Rs 1 lakh per borrower.
• Persons with disabilities.
• Minority communities may be notified by the Government of India from time to time
• Overdraft availed by PMJDY account holders as per limits and conditions prescribed by the Department of Financial Services, Ministry of Finance from time to time may be classified under Weaker Sections.
• In States, where one of the minority communities notified is found to be in majority, the above covers only the other notified minorities. 
• These States and Union Territories are Punjab, Meghalaya, Mizoram, Nagaland, Lakshadweep and Jammu & Kashmir.

Activities Covered under Priority Sector Lending

The activities covered under priority sector lending are as follows:

Agriculture

• The lending to the agriculture sector includes Farm Credit (Agriculture and Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities.
• Farm Credit to Individual farmers including Self Help Groups (SHGs) or Joint Liability Groups (JLGs) includes groups of individual farmers and Proprietorship firms of farmers, directly engaged in Agriculture and Allied Activities, such as dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.
• Crop loans include loans for traditional/non-traditional plantations, horticulture and allied activities.
• Medium and long-term loans for agriculture and allied activities such as the purchase of agricultural implements and machinery and developmental loans for allied activities.
• Loans for pre and post-harvest activities viz. spraying, harvesting, grading and transporting their own farm produce.
• Loans to distressed farmers indebted to non-institutional lenders.
• Loans under the Kisan Credit Card Scheme.
• Loans to small and marginal farmers for the purchase of land for agricultural purposes.
• Loans against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.
•  The limit is fixed up to Rs.75 lakh against Negotiable Warehouse Receipts and up to  Rs. 50 lakh against warehouse receipts not coming under the above category.
• Loans to farmers for installation of stand-alone Solar Agriculture Pumps and solarisation of grid-connected Agriculture Pumps.

Agricultural Infrastructure

• Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including the storage units/ cold storage chains designed to store agricultural produce/products, irrespective of their location.
• Soil conservation and watershed development.
• Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer, and vermicomposting.
• For the above, the aggregate sanctioned limit of credit is Rs 100 crore per borrower from the banking system.

Ancillary Activities

• Loans up to Rs 5 crore to co-operative societies of farmers for disposing of the produce of members.
• Loans for setting up of Agriclinics and Agribusiness Centers.
• Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs 100 crore per borrower from the banking system.
• Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and  Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture.
• Other eligible funds are with NABARD if a priority sector shortfall is noticed.

Small and Marginal Farmers

• Farmers with land holdings of up to 1 hectare come under the Marginal Farmer category. 
• Farmers with a landholding of more than 1 hectare and up to 2 hectares are considered Small Farmers.
• Landless agricultural labourers, tenant farmers, oral lessees and share-croppers.
• Loans to Self Help Groups, where groups of individual Small and Marginal farmers are directly engaged in Agriculture and Allied Activities.
• Banks have to maintain disaggregated data of such loans.
• Loans to farmers’ producer companies of individual farmers, and co-operatives of farmers directly engaged in Agriculture and Allied Activities.
• In this case, the membership of Small and Marginal Farmers is not less than 75 per cent and their land-holding share should not be less than 75 per cent of the total land-holding.

Micro, Small and Medium Enterprises (MSMEs)

• Micro enterprises are the ones where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees.
• Small enterprises are the ones where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees.
• Medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees

Bank loans to Micro, Small and Medium Enterprises, for both manufacturing and service sectors are eligible to be classified under the priority sector as per the following-

• Manufacturing Enterprises
  • Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule of the Industries (Development and Regulation) Act, 1951.
  •  They are notified by the Government from time to time, such industries are defined in terms of investment in plant and machinery.

• Service Enterprises 
  • Bank loans up to Rs 5 crore per unit to Micro and Small Enterprises and Rs 10 crore to Medium Enterprises engaged in providing or rendering services.
  •  They are defined in terms of investment in equipment under the MSME Development Act, 2006.

• Khadi and Village Industries Sector 
  • All loans to units in this sector are eligible for classification under the sub-target of 7.5 per cent prescribed for Micro Enterprises under the priority sector.

Education

• Loans to individuals for educational purposes, including vocational courses, not exceeding Rs 20 lakh are considered eligible for priority sector classification.
• Loans currently classified as a priority sector would continue till maturity.

Housing

• Loans to individuals up to Rs 35 lakh in metropolitan centres. 
• Up to Rs 25 lakh in other areas apart from Urban centres for purchase/construction of a dwelling unit per family.
• The overall cost of the dwelling unit in the metropolitan centre and at other centres should not exceed Rs 45 lakh and Rs 30 lakh respectively.
• The housing loans to banks’ employees are excluded.
•  Loans up to Rs10 lakh in metropolitan centres and up to  Rs 6 lakh in other centres for repairs to damaged dwelling units conforming to the overall cost of the dwelling unit.
• Bank loans to any governmental agency for construction of dwelling units or slum clearance and rehabilitation of slum dwellers subject to dwelling units with a carpet area of not more than 60 sq.m.

Social infrastructure

• Loans up to a limit of  Rs 5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities.
• It includes the construction/ refurbishment of household toilets and water improvements at the household level.
• Loans up to a limit of Rs 10 crore per borrower for building health care facilities including under Ayushman Bharat in Tier-2 to Tier-6 centres
•  In the case of UCBs, the above limits are applicable only in centres having a population of less than one lakh.
• Bank credit to Micro Finance Institutions (MFI) extended for on-lending to individuals/ members of SHGs/ JLGs for water and sanitation facilities are also eligible under these categories,  subject to certain criteria.

Renewable Energy

• Loans up to Rs 30 crore to borrowers for purposes such as solar-based power generators, biomass-based power generators, windmills, and micro-hydel plants.
• Non-conventional renewable energy-based public utilities like street lighting systems and remote village electrification. 
• For individual households, the loan limit is Rs 10 lakh

Others

• Loans not exceeding Rs 1.00 lakh per borrower are provided directly by banks to individuals and individual members of SHGs when they fulfil certain criteria of annual income.
• Loans not exceeding Rs 2.00 lakh are provided directly by banks to SHG for activities other than agriculture or MSME, such as meeting social needs, construction or repair of houses, construction of toilets or any viable common activity started by the SHGs.
• Loans to distressed persons not exceeding Rs 1,00,000/- per borrower to prepay their debt to non-institutional lenders.
• Loans sanctioned to State Sponsored Organizations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs and/or the marketing of the outputs of the beneficiaries of these organizations.

Conclusion

Priority sector lending has enabled many to avail the facilities of institutional credit, which is otherwise difficult provided the exploitative non-institutional credit sources farmers and share crop growers usually resort to as a last option. It has also given impetus to the growth of small and micro enterprises, creating more enterprises, and promoting entrepreneurship.

However, there are some apprehensions as to whether loans to certain domains can create NPAs for the banks. The dichotomy of reliable credit and cases translating to NPAs should be addressed. Genuine enterprises in need of credit should not suffer. 

Further, there exist expert views as to how converting some part of priority sector lending to a grant paid directly by the government can unlock large amounts of efficiency in the system. It is believed to dramatically increase the valuation of public sector banks, and be of immense help to weaker segments, in need of institutional credits. All stakeholders must come forward to evolve a mechanism to reduce the NPA contribution from potential sectors. Moreover, it will ensure the necessary institutional credit facilities to various ventures, enterprises, farmers, and other similar groups, providing them breathing space to shape their dreams, growth and livelihood.

This article is relevant for the sections of the Economics part of the UPSC Syllabus prescribed for the Preliminary and Main Stages of Civil Services Exam.

Priority Sector Lending [UPSC Notes]:-Download PDF Here

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