Priority Sector Lending Certificates (PSLCs)

Certificates that are issued against priority sector loans for banks

What are Priority Sector Lending Certificates (PSLCs)?

Priority sector lending certificates (PSLCs) are certificates that are issued against priority sector loans for banks. They allow banks to meet their targets and sub-targets – when it comes to priority sector lending – by buying the instruments. The banks use PSLCs to guard against shortfalls. The lending certificates also incentivize – through surplus – to lend more to priority sectors.

 

Priority Sector Lending Certificates

 

PSLCs are used mainly in India and elsewhere in Asia. PSLCs are essentially social credits that promote comparative advantages while banks in India fulfill their PSL duties. The goal of PSLCs is to facilitate market efficiency, creating jobs in priority sectors. It both improves the overall competitiveness of the economy and ensures that market infrastructure will be strong.

 

Summary: 

  • Priority sector lending certificates (PSLCs) are financial instruments that can be borrowed against by banks in India, allowing them to make their target and sub-target goals in terms of loans being offered.
  • Public sector lending (PSL) is mandated by the Reserve Bank of India (RBI), making it a requirement for domestic and foreign banks to offer loans to specific sectors and sub-sectors within the nation’s economy.
  • PSLCs are important because they help banks protect against shortfall as they lend to minority populations and sectors that typically perform weaker.

 

What is Priority Sector Lending?

Priority sector lending (PSL) is mandated by the Reserve Bank of India (RBI), which is the equivalent of the Federal Reserve in the United States. It requires all banks to offer a percentage of their loans to specific sectors, mostly those that tend to struggle or underperform, or those that benefit the country as a whole, which ultimately boosts the economy.

 

Sectors and Sub-Sectors Involved with PSLCs

Sectors that are specified by the RBI include (but are not limited to) lending for allied support, small and micro businesses, housing for the poor, education, and a host of other low-income groups that need financial assistance.

PSL is designed to promote the development of weaker sections within the country, thereby supporting the economy in India.

The RBI mandates that PSL should account for nearly half (about 40%) of Adjusted Net Bank Credit (ANBC) or the credit equivalent amount of off-balance sheet exposure, depending on which percentage is higher. The sub-target sectors of PSL include agriculture, which should account for 18% of the total (with a caveat that 8% of that goes to small farmers), and 7.5% should go to small businesses. This is the statute for all domestic banks and for foreign banks (with national ties) with 20 branches or more.

 

More Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

  • Debt Capacity
  • Gross Domestic Product (GDP)
  • Loan Covenant
  • Peer-to-Peer Lending