IBPS Test 8

Priority sector lending is a regulatory framework through which the Reserve Bank of India mandates that banks must direct a specified proportion of their adjusted net bank credit towards sectors of the economy that are considered socially and economically important but may not receive adequate credit from commercial banks operating purely on market principles. The rationale for priority sector lending arises from market failures in credit allocation, where small borrowers, agricultural producers, micro enterprises, and weaker sections of society face difficulties in accessing formal credit due to lack of collateral, high transaction costs, information asymmetries, and risk perceptions of lenders. By requiring banks to maintain minimum lending targets for these segments, the Reserve Bank ensures that formal banking credit reaches sections of the economy that the market would otherwise underserve. The overall priority sector lending target is set at forty per cent of adjusted net bank credit for domestic scheduled commercial banks, with specific sub-targets for agriculture, micro enterprises, advances to weaker sections, and other specified categories. The agricultural sub-target requires banks to direct at least eighteen per cent of adjusted net bank credit to agriculture, with a sub-limit for small and marginal farmers. Agriculture credit has traditionally flowed through Kisan Credit Cards, crop loans, term loans for allied activities, and loans for agricultural infrastructure. Banks that fail to achieve their priority sector lending targets are required to contribute to the Rural Infrastructure Development Fund maintained by NABARD or similar funds, effectively channelling resources to rural development even if direct lending targets are missed. The micro and small enterprise sub-target ensures that banks provide credit to small businesses for equipment purchase, working capital, and infrastructure. The MUDRA scheme, which provides loans to micro enterprises without formal collateral requirements, has been an important vehicle for channelling priority sector credit to this segment. Lending to weaker sections encompasses scheduled castes, scheduled tribes, minority communities, women borrowers, differently abled persons, and beneficiaries of various government poverty alleviation schemes. The Pradhan Mantri Mudra Yojana, Pradhan Mantri Awas Yojana, and Stand-Up India scheme are examples of government programmes through which priority sector credit has been channelled to specified target groups. Priority sector lending certification has been developed as a mechanism through which banks can buy and sell PSL certificates to manage their compliance with sub-targets, improving the efficiency of the overall PSL framework and allowing banks with surplus lending in certain categories to assist those with shortfalls. Microfinance institutions, small finance banks, and non-banking financial companies also play important roles in delivering credit to priority sector borrowers, often in areas and to customers that mainstream commercial banks find difficult to serve directly.