Priority Sector Lending Norms – Historical trend and Time to realign

Climate change has led to the emergence of new concept of green financing which requires huge commitment of allocation of funds. Climate adaptation has taken centre stage at recently held COP29 at the UN global climate summit.

- Abhay Dandwate

Prior to the independence access to the institutional credit through banks was confined to the big business houses and elite class. Post independence particularly late 60s it was realized that if the country has to move toward developing path its masses should grow economically, which led to the concept of mass banking. Nationalization of Banks in 1969 and introduction of Lead bank scheme, Service area approach coupled with rolling out of many centrally sponsored government schemes provided directional push towards upliftment of the large rural and urban poor population.

The Origins of priority sector lending (PSL) can be traced back to 1966 when Late Shri Morarji Desai realised the need for increasing credit to agriculture and small industries later the definition for priority sector was formalised based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972.

The broader principal of PSL policy is to mandate banks to allocate a certain proportion of their loans to critical sectors such as agriculture, education, small and medium industries, housing, export credit, education, social infrastructure and renewable energy ensuring equitable credit distribution to these sectors.

Priority sector classification has undergone many tweaking over the period initially, in 1974, the commercial banks were given a target of 33.33% of their total credit but following the recommendations of Dr K S Krishnaswamy Committee, this target was later revised to 40%. The last detailed study and recommendation on priority sectors was undertaken in 2012 by Nair committee. Post 2012 only minor changes have been made in the priority sector guidelines.