QA Series 03 - PSL Part 3

 

The Banking Tutor

Question Answer Series 2025

S No 03                                                                    05-06-2025

Priority Sector Lending (PSL) – Part 03 

01. What are Inter Bank Participation Certificates (IBPCs) ? 

An IBPC is a financial instrument where one bank (the issuer) "borrows" money from another bank (the lender) for a short period, promising to return the principal with a specified interest rate. 

02. How Banks use IBPCs? 

IBPCs are used by banks to manage liquidity and meet regulatory requirements, particularly for meeting priority sector lending targets. 

03. What IBPCs are eligible for classification under PSL ? 

IBPCs bought by banks, on a risk sharing basis, are eligible for classification under the respective priority sector categories, provided the underlying assets are eligible to be classified under the respective categories. 

04. What are Priority Sector Lending Certificates (PSLCs) ? 

Priority Sector Lending Certificates (PSLCs) are tradable instruments issued by banks that exceed their priority sector lending targets, allowing banks with shortfalls to meet their obligations by purchasing them.  

05. Where the PSLCs are traded ? 

The provides a trading platform (e-Kuber) for banks to trade  PSLCs. 

06. In the context of PSL, what are considered as Social Credits ? 

In the context of Priority Sector Lending (PSL), "social credits" essentially refer to the Priority Sector Lending Certificates (PSLCs). These are financial instruments that allow banks to fulfil their PSL obligations by buying and selling credits with other banks. PSLCs are essentially "social credits" that banks can use to meet their mandated priority sector lending targets, which are set by the RBI. 

07. Explain mechanism of PSLCs . 

Banks that lend more to priority sectors than required can issue PSLCs, which can then be traded on a platform like RBI's e-Kuber. Banks that fall short of their targets can purchase these certificates to fulfil their obligations. 

08. What is the objective of PSLCs? 

The goal of PSLCs is to promote market efficiency in priority sector lending, incentivize banks to lend to priority sectors, and help banks that struggle to meet their targets. 

09. How Banks are benefitted by PSLC Scheme ? 

For banks with surplus lending: They can earn additional income by selling PSLCs. 

For banks with shortfalls: They can meet their PSL targets without having to increase their lending to priority sectors.

10. How the Economy is  benefitted by PSLC Scheme ? 

For the economy: PSLCs can help direct credit to priority sectors, which can lead to increased employment, infrastructure development, and overall economic growth. 

11. What is the life span of a PSLC ? 

PSLCs are short-term accounting instruments that expire at the end of the financial year in which they were issued. 

12. How Banks classify loans given to MFIs for On-lending ? 

Loans disbursed by banks to MFIs are eligible for categorisation as priority sector advances under respective categories viz., Agriculture, MSME, Social Infrastructure and Others, provided the MFIs adhere to the conditions prescribed. 

13. How Banks classify loans to NBFCs for On-Lending ? 

Bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible for classification as priority sector lending under the respective categories subject to the following conditions:

(a) Agriculture: Up to ₹10 lakh per borrower in respect of ‘term lending’ component under Agriculture. 

(b) Micro & Small enterprises: Up to ₹20 lakh per borrower provided banks maintain disaggregated data of such loans in the portfolio. 

14. How Banks classify loans to HFCs for On-Lending ? 

Bank credit to Housing Finance Companies (HFCs), approved by NHB  for on-lending for the purpose of purchase/ construction/reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, will be eligible for classification as priority sector lending, subject to an aggregate loan limit of ₹20 lakh per borrower under ‘Housing’ category. 

15. What is the Cap on On-lending to NBFcs? 

Bank credit to NBFCs (including HFCs) for on-lending  will be eligible for PSL classification up to an overall limit of 5% of individual bank’s total priority sector lending of the previous financial year. 

16. What Banks can do in case of shortfall of PSL (compared to target) ? 

All banks reporting shortfall in priority sector lending vis-à-vis the prescribed target/sub-targets shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) and other funds with NABARD/NHB/SIDBI/MUDRA Ltd., as decided by the RBI. 

17. How to compute PSL target achievement ? 

While computing priority sector target achievement, shortfall/excess lending for each quarter will be monitored separately. A simple average of all quarters will be arrived at and considered for computation of overall shortfall/excess at the end of the year. The same method will be followed for calculating the achievement of priority sector sub-targets. 

18. What is the Rate of Interest payable on RIDF balances ? 

The interest rates payable to banks for their contribution to RIDF is based on the extent of shortfall in Achievement of PSL targets. 

19. What is the Rate of Interest on RIDF if shortfall in PSL achievement is less than 5 percentage points (PP) ? 

Bank Rate minus 2 

20. What is the Rate of Interest on RIDF if shortfall in PSL achievement is less than 10 percentage points (PP) but above 5 PP? 

Bank Rate minus 3 

21. What is the Rate of Interest on RIDF if shortfall in PSL achievement is 10 percentage points (PP) and above ? 

Bank Rate minus 4 

22. What is the rate on RIDF, in case achievement of overall Priority credit , but shortfall in any sub-category ? 

In case of no shortfall in overall PSL target but shortfall in any sub-target, interest rate of Bank Rate minus 2 percentage points will apply. 

23. In case of mis-classification noticed in PSL, what RBI will do ? 

The mis-classifications in PSL, if any, identified by the RBI (DoS) will be adjusted from the PSL achievement of the relevant year, to which the amount of misclassification pertains, and shortfall will be allocated to various funds in the subsequent years.

24. What are the non-financial penalties levied by RBI in case of Non Achievement of PSL Targets ? 

Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes. 

25. What are Common guidelines for Priority Sector Loans ? 

(a) No loan related and ad hoc service charges/ inspection charges shall be levied on priority sector loans up to ₹50,000. In the case of eligible priority sector loans to SHGs/JLGs, this limit will be applicable per member and not to the group as a whole. 

(b) Record shall be maintained by the bank of the date of receipt of application, sanction, disbursement, rejection with reasons thereof, etc. 

(c) Banks shall provide acknowledgement of receipt of applications for priority sector loans. This acknowledgement is known as Token of Service. 

(d) Each priority sector loan shall be classified only in any one of the eight identified categories.

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Next Issue  will be shared on 7^th  June 2025.

Sekhar Pariti

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