Daily Current Affairs : 24-June-2024
Priority Sector Lending (PSL) is a key initiative by the Reserve Bank of India (RBI) aimed at making sure that essential, yet underserved, sectors of the financial system receive enough financial assistance. This policy directs banks to lend a certain percentage of their budget to regions that require special attention but might struggle to access credit through traditional means.
Purpose of PSL
The fundamental aim of PSL is to promote inclusive economic growth by supplying financial assistance to sectors like agriculture, Micro, Small, and Medium Enterprises (MSMEs), education, housing, social infrastructure, and renewable energy. These sectors often find it hard to obtain loans from mainstream financial institutions due to their risk profile or lack of formal credit history. By providing credit to these sectors, PSL helps in creating a more equitable economy where all sectors have the opportunity to grow.
PSL Norms and Requirements
Since its formalization in 1972, the PSL framework has ensured that vulnerable sectors receive adequate credit. According to the RBI’s guidelines, banks are required to allocate a certain portion of their total credit (Adjusted Net Bank Credit or ANBC) toward priority sectors. These targets are different for various types of banks, and the key figures for 2024-25 are as follows:
- Scheduled Commercial Banks and Foreign Banks with 20 or more branches: The target is 40% of their total credit.
- Regional Rural Banks (RRBs) and Small Finance Banks (SFBs): These banks are required to direct 75% of their credit toward PSL.
- Urban Cooperative Banks (UCBs): These banks have a target of 65% for FY 2024-25, which will rise to 75% in FY 2025-26.
These goals aim to ensure that financial resources are directed to sectors that are critical for the development of the economy but are often overlooked by traditional banking.
Types of Banks Covered by PSL
The PSL norms are applicable to a wide range of banks in India, including:
- Commercial Banks (both public and private sector)
- Regional Rural Banks (RRBs)
- Small Finance Banks (SFBs)
- Urban Cooperative Banks (UCBs)
These banks play a vital role in meeting the credit needs of sectors like agriculture, education, housing, and renewable energy. Their participation ensures that these sectors receive the necessary financial support for growth and development.
Important Points:
- Objective: PSL ensures that essential but underserved sectors receive financial support, promoting inclusive economic growth.
- Target Sectors: Includes agriculture, MSMEs, education, housing, social infrastructure, and renewable energy.
- RBI Guidelines: Banks must allocate a portion of their total credit towards PSL:
- Scheduled Commercial Banks & Foreign Banks (20+ branches): 40% of total credit.
- Regional Rural Banks (RRBs) & Small Finance Banks (SFBs): 75% of total credit.
- Urban Cooperative Banks (UCBs): 65% for FY 2024-25, rising to 75% in FY 2025-26.
- Bank Types Covered:
- Commercial Banks (Public and Private)
- Regional Rural Banks (RRBs)
- Small Finance Banks (SFBs)
- Urban Cooperative Banks (UCBs)
- Importance: PSL helps direct financial resources to sectors that are often ignored by traditional banks, supporting sectors critical for the economy’s overall development.
- Goal: To ensure that vulnerable sectors like agriculture, education, and renewable energy get the credit they need for growth, fostering sustainable development.
Why In News
The Reserve Bank of India (RBI) has recently revised the Priority Sector Lending (PSL) norms to ensure that more financial resources are directed towards critical sectors of the economy, promoting inclusive and sustainable growth. These revisions are aimed at addressing the evolving needs of vulnerable sectors, such as agriculture, MSMEs, education, and renewable energy, which often face challenges in accessing formal credit. By increasing the PSL targets for certain types of banks, the RBI seeks to strengthen support for these priority sectors and further enhance financial inclusion across India.
MCQs about Priority Sector Lending (PSL)
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What is the primary objective of the Priority Sector Lending (PSL) initiative by the Reserve Bank of India (RBI)?
A. To ensure financial support for only large industries
B. To promote inclusive economic growth by directing funds to underserved sectors
C. To increase the profits of commercial banks
D. To encourage private sector investment in the banking system
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According to the revised PSL norms for FY 2024-25, what is the PSL target for Urban Cooperative Banks (UCBs)?
A. 50%
B. 40%
C. 65%, rising to 75% in FY 2025-26
D. 75%
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Which of the following sectors is NOT explicitly mentioned as a priority sector under the RBI’s PSL norms?
A. Agriculture
B. Education
C. Information Technology
D. Renewable Energy
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Who is required to comply with the PSL norms according to the Reserve Bank of India?
A. Only commercial banks in urban areas
B. Only public sector banks
C. All commercial banks, including Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Urban Cooperative Banks (UCBs)
D. Only foreign banks operating in India
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