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What are Priority Sector Lending Certificates (PSLC)?

Banks are assigned targets for lending to sectors specified under the Priority Sector Lending (PSL) guidelines. If a bank is unable to meet its PSL target, it has an option to buy the priority sector lending certificates (PSLC) from other banks to meet the shortfall.

What are Priority Sector Lending Certificates (PSLC)?

When a bank makes the priority sector lending (PSL) in excess of the prescribed target, it can sell the surplus lending to the banks falling short on their targets, in the form of priority sector lending certificates (PSLC).

Who can buy or sell PSLC?

Scheduled Commercial Banks, Regional Rural Banks (RRBs), Local Area Banks, Small Finance Banks (SFBs) and Primary (Urban) Co-operative Bank (UCBs) can buy or sell the PSLC.

What are the types of PSLC?

The PSLC are of the following types –

  1. PSLC Agriculture
  2. PSLC SF / MF (small and marginal farmers)
  3. PSLC Micro Enterprises
  4. PSLC General (overall priority sector target)

What are the features of PSLC?

  • PSLCs are traded through the CBS portal (e-Kuber) of Reserve Bank of India (RBI). The order matching is done on an anonymous basis.
  • PSLCs have a standard lot size of ₹25 lakh and multiples thereof.
  • The buyer pays a fee to the seller which is market determined.
  • There is no transfer of credit risk as there is no transfer of loan assets.
  • All PSLCs expire by March 31st, irrespective of the date it is first sold. It cannot be for more than 1 year.
  • Secondary market is available for PSLCs. Banks buy PSLCs in anticipation of shortfall. However, in case there happens to be surplus, they can sell this surplus.
  • Net position of PSLCs sold and purchased is to be reported by banks on quarterly and annual basis.
  • If RBI inspection team de-classifies a particular PSLC (which has been already traded by the bank as PSLC), it is reduced from the achievement of PSLC seller bank only. There is no counterparty risk for the PSLC buyer.

How is bank’s PSL achievement calculated?

A bank’s PSL achievement is computed as the sum of outstanding priority sector loans, and the net nominal value of the PSLCs issued and purchased. 

What action is taken against banks failing to achieve PSL target?

Banks having any shortfall in lending to priority sector need to contribute to Rural Infrastructure Development Fund (RIDF) established with National Bank for Agriculture and Rural Development (NABARD) and other funds with NABARD / National Housing Bank (NHB) / Small Industries Development Bank of India (SIDBI) / Micro Units Development & Refinance Agency Ltd. (MUDRA Ltd).

The interest rates on banks’ contribution to RIDF or any other funds, tenure of deposits, etc. is fixed by Reserve Bank of India (RBI).


References

Reserve Bank of India. (2016, April 07). 'Priority Sector Lending Certificates'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10339&Mode=0

Reserve Bank of India. (2020, September 04). 'Master Directions – Priority Sector Lending (PSL) – Targets and Classification (Updated as on October 20, 2022)'. Retrieved from https://m.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=11959

Reserve Bank of India. (2021, November 09). 'FAQs on Master Directions on Priority Sector Lending Guidelines'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=87


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