Revamp priority sector lending, says eco council

NEW DELHI: Just 7% or 63 districts in the country corner over 45% of the priority sector loans (PSL), given by banks totalling Rs 22.4 lakh crore, as the over 50-year-old govt initiative has failed to deliver loans for the poorest districts, the Economic Advisory Council to PM (EAC-PM) has said in its latest working paper, while calling for an overhaul of the policy. It has also suggested a possible reduction of the 40% target that banks are mandated to meet annually.

“On expected lines, most of advances to the priority sector have been extended to state capitals or important industrial districts. Underserved regions include Himalayan states, Northeastern states, eastern Uttar Pradesh, Bihar, Jharkhand, Odisha, parts of Madhya Pradesh (eastern region) and parts of Rajasthan,” the paper authored by EAC–PM chairman Mahendra Dev noted as it examined the status and distribution of PSL, using RBI’s district level quarterly data for 2020–2025.

The paper also said even large banks such as State Bank of India, which has the largest national footprint, have failed to meet the target in recent years and have resorted to buying PSL certificates from small finance banks. This indirect facility was introduced by RBI in 2016 to help mitigate profitability risks from PSLs by allowing banks to trade the fulfilment of priority sector obligations at a market determined rate, without trading the underlying asset or risk.

“The focus of PSLs should be changed from economic to social equity. Emphasis should be placed on its original goals of making credit available to small/marginal farmers, small scale industries, and weaker sections. Legacy inclusions in the definition of priority sector that are no longer relevant can be removed, and the overall target can be lowered. With these changes, banks will have more flexibility in allocating capital, while restoring emphasis on the social goals of PSL,” the paper said. It added that RBI’s latest “disincentive framework” addressing the skewed lending, by weighing credit at 125% for underserved districts and 90% for well-served ones may backfire on national productivity as it forces capital diversion. “Diversion of credit may thus reduces TFP (total factor productivity) growth in districts that see an outflow of PSLs, without a commensurate increase in beneficiary districts.”

It argued that merely releasing funds to districts with lowest PSL access may not be a desirable outcome and called for targeted interventions, such as infrastructure development and improving market access.

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