Priority Sector Lending Imbalance: EAC-PM Working Paper
Why in the news
A working paper from the Economic Advisory Council to the Prime Minister (EAC-PM) highlights how unevenly priority sector credit is spread across Indian districts, and argues the PSL framework needs a periodic rethink.
Key facts
- Data used: district-level quarterly figures from 2020 to 2025, covering over 95% of scheduled commercial bank credit.
- Headline finding: fewer than 10% of districts hold over 45% of PSL advances.
- Credit clusters in relatively developed states and urbanised districts; eastern India, the Northeast and Himalayan regions are largely underserved.
- Districts with the lowest PSL penetration show the weakest economic response to more lending, hinting that infrastructure, connectivity and administrative capacity matter alongside credit.
Recommendations
- Strengthen market-based tools such as PSLCs.
- Let banks specialise according to their comparative strengths.
- Sharpen district-level targeting of PSL.
- Pair credit expansion with investment in infrastructure and institutional capacity.
- Review PSL targets and sub-targets regularly to match a changing economy.
About Priority Sector Lending
PSL is an RBI mandate requiring banks to deploy a set share of adjusted net bank credit (ANBC) to sectors seen as vital for inclusive growth: agriculture and allied activities, MSMEs, education, housing for weaker sections, social infrastructure, renewable energy, export credit (in some cases) and weaker sections.
| Bank type | PSL target (share of ANBC) |
|---|---|
| Domestic commercial banks | 40% |
| Foreign banks with 20+ branches | 40% |
| Foreign banks with fewer than 20 branches | 40% |
| Small Finance Banks | 60% |
| Urban Co-operative Banks | 60% |
| Regional Rural Banks | 75% |
| Sub-target | Share of ANBC |
|---|---|
| Agriculture | 18% (of which 10% for small and marginal farmers) |
| Micro enterprises | 7.5% |
| Weaker sections | 12% |
Related instruments and bodies
- PSLC: a market-based certificate to trade PSL obligations; surplus banks sell, banks short of targets buy. Four categories: Agriculture, Small and Marginal Farmers, Micro Enterprises and General. Introduced on the Raghuram Rajan Committee (2008) recommendation.
- RIDF: maintained by NABARD since 1995-96; gets contributions from banks missing PSL targets, especially agriculture and weaker sections, and funds rural roads, bridges, irrigation, watershed development, social-sector infrastructure and rural schools.
- EAC-PM: an independent body advising the PM on growth, monetary policy, public finance, employment, social welfare and competitiveness.
Exam angle
- Concentration stat: under 10% of districts, over 45% of PSL advances.
- Target to remember: RRBs 75% of ANBC; SFBs and UCBs 60%; others 40%.
- PSLC categories: four; RIDF held by NABARD from 1995-96.