RBI’s revision of priority sector lending norms is welcome but it should also focus on the hurdles

It is just as well that priority sector lending (PSL) norms are tweaked from time to time to keep pace with changing socio-economic realities and to ensure that the stated objective of meeting the credit needs of agriculture, small industries and weaker sections are met. Although banks do meet the broad PSL norm of 40 per cent of adjusted net bank credit, there are slippages in meeting sub-sectoral targets (18 per cent of ANBC for agriculture, 10 per cent for weaker sections and 7.5 per cent for micro enterprises). The recent announcement of the Reserve Bank of India in this respect seeks to direct credit to new ‘priority’ sectors such as start-ups (renewables were added to this list a few years back), besides addressing sectoral as well as regional gaps in credit flows. It follows from the September 2019 report of the RBI’s internal working group on agriculture credit. The RBI has now revised the ‘weightages’ for PSL in an effort to address district-level imbalances in the flow of PSL credit. It has also raised the start-up funding limit to ₹50 crore. The effort here is to redirect funds away from 205 districts which receive a PSL per capita of over ₹25,000 to 184 districts which receive less than ₹6,000.

The September 2019 report observes: “Some of the States are getting much higher share, as high as 10 per cent of total agricultural credit compared to other States getting as low as 0.5 per cent. Also, in some States, viz., Bihar, Chhattisgarh, Jharkhand, West Bengal, etc., bank credit was not proportionate to their share in agricultural output.” The 8 per cent sub-target for small and marginal farmers (within the broad agriculture category of 18 per cent) too has not been well covered. According to the report, only 40.9 per cent of such farmers could be covered by banks. If this is the shortfall at a broader level, the regional variations would only magnify the gap.

The issue, however, is whether the new moves will work. Banks are able to trade in priority sector lending certificates (akin to ‘carbon credits’) to meet PSL shortfalls in various categories, while also investing in the Rural Infrastructure Development Fund, which offers a below-market return. Unfortunately, RIDF investments have dipped over time, reducing funds for public investment in agriculture in the credit-deficit regions. PSL targets have also been met by lending to relatively affluent sections such as large farmers, businesses, traders and transporters. This has become easier with the rise in limits for loans. However, digitisation of land records will help in precise credit delivery. Besides, loan waivers cannot serve the cause of PSL. As for loans to start-ups, these are hard to value and do not have collateral. They are more suited to risk finance. The RBI would do well to focus on stumbling blocks to its laudable objective of reaching credit to priority sectors and borrowers.

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