What are Priority Sector Lending Certificates?

The RBI has released guidelines for last week (April 7, 2016) released guidelines for trading in priority sector lending certificates (PSLC). As per the guidelines, banks can buy and sell PSL credits to manage their priority sector lending requirements.

Why PSLCs?

At present, domestic banks (and foreign banks with more than 20 branches) have to lend 40 per cent of their total loans to eight priority sectors comprising of agriculture, micro credits, education, social infrastructure and housing so that these unprivileged sections can get credit. There are targets for sub sectors also.

Many banks can’t meet the stipulated norm during many years and are financing the development programmes stipulated by the government as a punitive measure. In this context, to encourage lending to the priority sector, the RBI has introduced the concept of Priority Sector Lending Certificates (PSLC).

What are PSLCs?

The Priority Sector Lending Certificates are certificates issued by banks that have overreached their priority sector lending targets. PSLCs thus can be issued only up to the extent of their over lending to the stipulated sectors. Buyers of PSLCs are usually those banks who could not meet their priority sector lending targets. The price of PSLCs will be determined on the basis of demand and supply that will be reflected in the auction under the RBI’s e-Kuber trading platform.

As per the RBI guidelines, banks can issue four types of PSLCs including three subsector PSLCs- agriculture, small and marginal farmers, micro enterprises and one PSLC for general.

The RBI guidelines explains the objective of PSLCs and their trading “To enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall and at the same time incentivize the surplus banks; thereby enhancing lending to the categories under priority sector.”

The PSLCs can be traded using the RBI’s e-Kuber platform.

Sellers and buyers of PSLCs are: Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks (when they become operational) and Urban Co-operative Banks who have originated PSL eligible category loans subject to such regulations as may be issued by the Bank.