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Priority Sector Lending: Norms and Impact
July 19, 20265 min read
Priority Sector Lending: Norms and Impact
Introduction
Priority Sector Lending (PSL) is a policy tool requiring banks to allocate a specified portion of their loans to sectors deemed strategically important for inclusive growth. These sectors - agriculture, MSMEs, education, housing, and weaker sections - typically face credit market failures due to information asymmetries, high transaction costs, or lack of collateral.
Historical Background
- 1969: Nationalization of 14 major banks - social control over banking
- 1972: Daheja Committee recommended priority sector targets
- 1974: RBI formalized PSL guidelines - 33% target for public sector banks
- 1990s Reforms: Narasimham Committee (1991, 1998) recommended rationalizing PSL
- 2000s: Targets extended to private and foreign banks
- 2015 onwards: Revised PSL guidelines - more categories, higher targets
Current PSL Targets (RBI Master Directions)
Overall Targets
| Category | Domestic Scheduled Commercial Banks | Foreign Banks (with 20+ branches) |
|---|---|---|
| Total PSL | 40% of ANBC* or CEOBE* | 40% |
| Agriculture | 18% (of which 8% to small/marginal farmers) | 18% |
| MSMEs | 7.5% (micro enterprises within this) | 7.5% |
| Education | No separate sub-target | No separate sub-target |
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