EAC-PM Paper Flags Regional Imbalances in Priority Sector Lending

Source: BS

Context:

A recent working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) has flagged sharp regional imbalances in Priority Sector Lending (PSL) in India. Using district-level quarterly data from 2020 to 2025 covering over 95 per cent of scheduled commercial bank credit, the study finds that fewer than 10 per cent of districts account for over 45 per cent of PSL advances. Districts with the lowest existing PSL penetration show the weakest economic response to additional lending, suggesting that infrastructure, connectivity, and administrative capacity matter as much as credit. The editorial argues for a periodic recalibration of the PSL framework, including more use of PSLCs, bank specialisation, and district-level targeting.

The Big Imbalance

• Fewer than 10 per cent of districts account for over 45 per cent of all PSL advances.
• Credit is concentrated in relatively developed states and urbanised districts.
• Eastern India, the Northeast, and Himalayan regions are largely underserved.
• Lowest PSL penetration districts show the weakest economic response to additional lending.

What the EAC-PM Paper Recommends

• Strengthen market-based instruments like PSLCs.
• Allow banks to specialise in terms of comparative strength.
• Improve district-level targeting of PSL.
• Combine credit expansion with investment in infrastructure and institutional capacity.
• Periodically review PSL targets and sub-targets to reflect a changing economy.

What is Priority Sector Lending (PSL)?

• A regulatory mandate by the RBI that requires banks to allocate a certain percentage of their adjusted net bank credit (ANBC) to specific sectors considered important for inclusive growth.
• Aimed at:
  • Agriculture and allied activities.
  • MSMEs.
  • Education.
  • Housing for the weaker sections.
  • Social infrastructure.
  • Renewable energy.
  • Export credit (in some cases).
  • Weaker sections of society.

PSL Targets by Bank Type (Locked-in Numbers)

• Domestic Commercial Banks and Foreign Banks with 20+ branches: 40 per cent of ANBC.
• Regional Rural Banks (RRBs): 75 per cent of ANBC.
• Small Finance Banks (SFBs): 60 per cent of ANBC.
• Foreign Banks with less than 20 branches: 40 per cent of ANBC.
• Urban Co-operative Banks (UCBs): 60 per cent of ANBC.

Key Sub-Targets within PSL

• Agriculture: 18 per cent of ANBC (with 10 per cent for Small and Marginal Farmers).
• Micro Enterprises: 7.5 per cent of ANBC.
• Weaker Sections: 12 per cent of ANBC.

What is a Priority Sector Lending Certificate (PSLC)?

• A market-based instrument that allows banks to buy and sell PSL obligations.
• Banks with surplus PSL lending can sell PSLCs.
• Banks falling short of PSL targets can buy PSLCs to comply.
• Four PSLC categories: Agriculture, Small and Marginal Farmers, Micro Enterprises, and General.
• Introduced based on the recommendations of the Raghuram Rajan Committee, 2008.

What is the Rural Infrastructure Development Fund (RIDF)?

• A fund maintained by NABARD, set up in 1995-96.
• Receives contributions from banks that fall short of PSL targets, especially in agriculture and weaker sections.
• The fund is used to finance rural infrastructure like rural roads, bridges, irrigation, watershed development, social-sector infrastructure, and rural schools.
• Acts as a buffer mechanism for PSL shortfalls.

What is the EAC-PM?

• The Economic Advisory Council to the Prime Minister (EAC-PM) is an independent body.
• It advises the PM on economic issues, including growth, monetary policy, public finance, employment, social welfare, and competitiveness.
• It produces policy papers, working papers, and reviews on important economic themes.

Practice MCQs

Q1. With reference to the EAC-PM working paper on Priority Sector Lending (PSL), consider the following statements:

1. Fewer than 10 per cent of districts account for over 45 per cent of all PSL advances.
2. PSL credit is heavily concentrated in relatively developed states and urbanised districts.
3. Districts with the lowest existing PSL penetration show the weakest economic response to additional lending.
4. The EAC-PM working paper recommends abolishing the PSL framework altogether.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the EAC-PM paper recommends recalibrating the PSL framework, NOT abolishing it.)

Q2. With reference to the institutional differences in PSL delivery in India, consider the following statements:

1. Small Finance Banks (SFBs) on average extended close to 100 per cent of their ANBC directly to priority sectors during the study period.
2. State Bank of India’s direct PSL exposure was around 26.5 per cent, with greater reliance on PSLCs.
3. Banks falling short of PSL targets contribute to NABARD’s Rural Infrastructure Development Fund (RIDF).
4. Private banks depended more heavily on direct lending and less on market-based PSL compliance mechanisms.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; private banks depended more heavily on market-based PSL compliance mechanisms like PSLCs, NOT direct lending.)

Q3. With reference to PSL targets in India, consider the following statements:

1. Domestic commercial banks and foreign banks with 20+ branches have a PSL target of 40 per cent of ANBC.
2. Regional Rural Banks (RRBs) have a PSL target of 75 per cent of ANBC.
3. Small Finance Banks (SFBs) have a PSL target of 60 per cent of ANBC.
4. Urban Co-operative Banks (UCBs) have a PSL target of 90 per cent of ANBC.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; UCBs have a PSL target of 60 per cent, NOT 90 per cent.)

Q4. With reference to PSL components and reforms, consider the following statements:

1. Agriculture’s sub-target under PSL is 18 per cent of ANBC, including 10 per cent for Small and Marginal Farmers.
2. The Weaker Sections sub-target under PSL is 12 per cent of ANBC.
3. In 2025-26, micro and small enterprises overtook agriculture as the single-largest component of PSL.
4. PSLCs were introduced based on the recommendations of the Raghuram Rajan Committee on Financial Sector Reforms (2008).

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the EAC-PM paper recommends recalibrating the PSL framework, not abolishing it.
2. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because private banks depended more on PSLC-based compliance, not direct lending.
3. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because UCBs have a PSL target of 60 per cent, not 90 per cent.
4. (d), All four statements are correct.