All you need to know on Priority Sector Lending Certificate

Priority Sector Lending is a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups. RBI specifies how much should be the Priority Sector Lending out of the total credit given by a bank. There are also are the different categories under priority sector viz agriculture.

Some lenders think the priority sector lending is not profitable to them. The profit in the form of the interest margin and other charges could be lesser when the cost involved in the form of assessments, small ticket sizes, recovery efforts and poor alternative channel penetration in these segments are considered. In other way round, some of the lenders like Regional Rural Bank and Local Area Banks are lending almost hundred percent of their advances to priority sectors. To make those who give more credit to the priority sectors incentivized and pass on the liquidity from those not have met the priority sector advances to those who have achieved, a new form of certificate called priority sector lending certificate (PSLC) is introduced.

A lender with surplus priority sector will issue PSL certificates. A market would be opened up for these certificates for buying and selling. In the PSLC market, the banks deficient in priority sector lending target can buy certificates to compensate for their shortfall in lending. 

Types of PSLC: As we have different targets for different categories under priority sector, the same is also reflected in the types of the PSLCs. A lender who is having surplus of Agriculture lending can issue and Agriculture PSLC and a lender who has shortfall in agriculture lending can buy this to reach the target. Thus he can avoid depositing in low yielding RIDF(Rural Infrastructure Development Fund). There are four types of PSLCs: Agriculture, Small and Marginal Farmers, Micro Enterprises and General. 

Who Proposed: Raghuram Rajan Committee on Financial Sector Reforms.

Trading platform- provided through the CBS portal of RBI that is e-Kuber.

Credit Risk: By selling PSLCs, risk underlying in such advances will not pass on to another bank. Credit risk will remain with the original lender. 

Amount eligible for issue: If a bank reaches its target of priority sector lending can issue PLSC to the tune of 50 percent of previous year’s PSL achievement.

Size of the PSLC: a standard lot size of Rs 25 lakh and multiples thereof.

Expiry of PSLC: All PSLCs will expire by March 31st irrespective of the date it was sold.

How will  it help the nation?: If Banks find priority sector lending is unprofitable, there will be a high price for the certificates in the market and it is expected that more lenders will be attracted towards priority sector lending. If the price is low, it is the scenario where all the lenders have met the target under priority sector lending. Both are good for the needy population.

Benefit to the banks: Banks with shortfall of priority sector obligations may be allowed to buy the PSLC and submit it towards fulfillment of their target. Banks with surplus of the priority sector targets can sell the certificates to get the money to invest somewhere else. 

How it works: (An example by RBI)-  Bank A may sell PSLCs with a nominal value of Rs 100 crores to Bank B on some date of the FY 2016-17. Bank B will reckon Rs 100 crore towards its priority sector achievement as on the reporting dates till March 31, 2017, while Bank A will subtract the same from its achievement figures for the respective reporting dates. The PSLC will expire by March 31, 2017. (Reporting dates are end of the every quarter)