Priority Sector Lending Certificates – Who Benefits?

It is the banks, not the Priority Sector, have benefitted from the Priority Sector Lending Certificates (PSLC) scheme. Dr. Manas R Das The year 1972 witnessed the crystallization of a formal Priority Sector definition. Subsequently, the Priority Sector Loans (PSL) guidelines underwent several deep changes. The initial exuberance of banks to promote PSL ebbed gradually due to several factors leading many banks to fall short of the stipulated targets – overall and sub-sectoral. Efforts were made to widen the scope of PSLs so that banks could lend to new segments directly besides supporting, indirectly, the asset creation efforts by such Apex financial institutions as NABARD (Rural Infrastructure Development Fund - RIDF), NHB, SIDBI, and MUDRA Bank. The Priority Sector Lending Certificates (PSLCs) scheme, which was operationalized by RBI in April 2016, is one such endeavor that originated from the Planning Commission’s Committee on Financial Sector Reforms (Chairman: Raghuram G. Rajan) (2008). The so-called “market mechanism” underlying the scheme is based on demand supply. Banks finding PSLs unprofitable and underachieving the targets/sub-targets would demand PSLCs which would be supplied by those overachieving the targets/sub-targets and vice versa. The buy-sell would continue until both find it profitable. Thus, the scheme envisages ‘aggregate’ PSLs to improve. RBI’s core banking solution portal, e-Kuber, facilitates trading in PSLCs. Normally, PSLCs are issued against the underlying assets; however, in the transaction, there is no transfer of risks or loan assets from the seller to the buyer. There are four types of PSLCs: (a) PSLC – Agriculture, (b) PSLC – Small/Marginal Farmers (SF/MF), (c) PSLC - Micro Enterprises, and (d) PSLC – General, i.e., other than loans to agriculture and micro-enterprises. As per the RBI data, the total trading volume of PSLCs which was Rs.49,800 crore during 2016-17 increased serially to reach Rs.4,67,789 crore during 2019-20, implying increasing participation and liquidity in the market. Trading volumes tend to rise at each quarter-end as buyers compete with each other to meet the quarterly Priority Sector targets. Among the four PSLC categories mentioned above, trading volume is the highest in respect of PSLC - General followed by PSLC – SF/MF. Normally, PSBs and private banks are major buyers and sellers of PSLCs; however, if buying and selling are netted, private banks and foreign banks emerge as major buyers, and PSBs, RRBs, and SFBs as major sellers. PSLCs help banks ‘reach’ the stipulated PSL targets in contrast to ‘incentivizing’ them to ‘actually’ increase their PSL. Therefore, the beneficiaries are banks that default on achieving the stipulated PSL targets/sub-targets, not the Priority Sector as such, and to that extent, it can be said that the scheme serves its purpose. It is estimated that during 2019-20, 7/18 PSBs fell short of their PSL targets to the tune of nearly Rs.50,000 crore potentially depriving about 16 lakh Priority Sector borrowers. The 40% target stipulated by the PSL guidelines is applicable to banks, individually. Thus, the logic behind PSLCs would result in uneven deployment of PSL across geographies and by extension, imbalanced agricultural and rural progress, since it is possible for bank/s to lend excessively or marginally under PSL. Sans risk-transfer, the provision to issue PSLCs up to 50% of the previous year’s PSL achievement, without having the underlying in its books make the scheme too accommodative. Since PSLCs can substitute for contribution by banks to RIDF, the contribution has slackened, which does not augur well for rural infrastructure development by NABARD.In sum, it is the banks, not the Priority Sector, have benefitted from the PSLC scheme. About the Author: Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medalist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of the Indian Institute of Bankers. He has won several awards, besides being a prolific writer.