FIntelligence 22 (April 28, 2015).
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In our newsletter dated March 06, 2015, we provided a comprehensive compliance check list as per
Companies Act 2013. In this newsletter, we provide the revised the Priority Sector Lending (PSL)
norms for all the scheduled commercial banks released by Reserve Bank of India (RBI).
The Reserve Bank of India on Thursday, 23rd April 2015 revised the Priority Sector Lending (PSL)
norms for all the scheduled commercial banks (excluding regional rural banks). The scope of the PSL
have been expanded to include new segments for lending such as

Medium enterprises (earlier only micro and small enterprises)

Social infrastructure – lending to social infrastructure for activities namely schools, health care
facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres

Renewable energy – lending to borrowers for purposes like solar based power generators,
biomass based power generators, wind mills, micro-hydro plants and for non-conventional
energy based public utilities viz. street lighting systems, and remote village electrification
The PSL norms have been widened to provide for more flexibility as well as will help investment in
areas such as health/sanitation, drinking water supply and also other emerging sectors like
solar/wind that require huge debt funding to provide a boost to the renewable energy companies.
While the total PSL target for all domestic scheduled commercial banks and foreign banks with 20
branches and above has been retained at 40%, foreign banks with less than 20 branches are now
required to increase their PSL portfolios to 40% in a phased manner by March 2020.
Category
Total Priority Sector
Domestic scheduled commercial banks and
Foreign banks with 20 branches and above
40% of ANBC or Credit Equivalent Amount of
Off-Balance Sheet Exposure, whichever is
higher.
Foreign banks with 20 branches and above
have to achieve the Total Priority Sector
Target within a maximum period of five
years starting from April 1, 2013 and ending
on March 31, 2018 as per the action plans
submitted by them and approved by RBI.
Foreign banks with less than 20
branches
40% of ANBC or Credit Equivalent
Amount of Off-Balance Sheet
Exposure, whichever is higher; to
be achieved in a phased manner
by 2020
 2015-16: 32%
 2016-17: 34%
 2017-18: 36%
 2018-19: 38%
 2019-20: 40%
FIntelligence 22 (April 28, 2015).
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Some of the salient features of the most recent PSL guidelines vis-à-vis earlier regulation are
highlighted section wise below.
1. Agriculture

The overall agriculture target above indicates that the recent guidelines now has merged the
direct agriculture sector lending target along with indirect agriculture sector lending target to
overall 18%. Instead lending to agriculture sector is further categorised into –
a. Farm Credit b. Agriculture infrastructure – storage facilities, cold storage
c. Ancillary Activity - Loans sanctioned by banks to MFIs for on-lending to agriculture sector

The above point implies that any form of bank credit extended to the MFIs for on-lending to
individuals and members of SHGs/JLGs for the purpose of agriculture will now directly qualify in
the overall agriculture sector lending target of 18% as against under indirect agriculture category
earlier.

This could potentially improve funding for the rural focused MFIs as most of their client base is
agri-dependent for income generation. And with increased funding to the MFIs in pursuit of agriloans could also lower the cost of borrowing for the MFIs.
23rd April, 2015
1st July, 2014
Domestic scheduled commercial banks and Foreign banks with 20 branches and above
18% of ANBC or Credit Equivalent Amount of OffBalance Sheet Exposure, whichever is higher.
Target of 8% of ANBC or Credit Equivalent Amount of
Off-Balance Sheet Exposure, whichever is higher is
prescribed for Small and Marginal Farmers, to be
achieved in a phased manner i.e., 7 per cent by March
2016 and 8 per cent by March 2017.
18% of ANBC or credit equivalent amount of
Off-Balance Sheet Exposure, whichever is
higher.
Of this, indirect lending in excess of 4.5% of
ANBC or credit equivalent amount of OffBalance Sheet Exposure, whichever is higher,
will not be reckoned for computing
achievement under 18% target.
N/A
FIntelligence 22 (April 28, 2015).
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Foreign banks with 20 branches and above have to
achieve the Agriculture Target within a maximum period
of five years starting from April 1, 2013 and ending on
March 31, 2018 as per the action plans submitted by
them and approved by RBI. The sub-target for Small and
Marginal farmers would be made applicable post 2018
after a review in 2017.
Not applicable for foreign banks with less than 20
branches

Small and Marginal Farmers will include loans to Self Help Groups (SHGs) or Joint Liability Groups
(JLGs), i.e. groups of individual Small and Marginal farmers directly engaged in Agriculture and
Allied Activities, provided banks maintain disaggregated data of such loans.
2. Micro, Small & Medium Enterprises
23rd April, 2015
1st July, 2014
Domestic scheduled commercial banks and Foreign banks with 20 branches and above
7.5% of ANBC or Credit Equivalent Amount of OffBalance Sheet Exposure, whichever is higher to be
achieved in a phased manner i.e. 7 per cent by March
2016 and 7.5 per cent by March 2017.
The sub-target for Micro Enterprises for foreign banks
with 20 branches and above would be made applicable
post 2018 after a review in 2017.

Advances to micro and small enterprises
sector will be reckoned in computing
achievement under the overall priority sector
target of 40% of ANBC or credit equivalent
amount of Off-Balance Sheet Exposure,
whichever is higher.
No sub-target for foreign banks with 20
branches and above
The most recent guidelines has laid out specific targets for bank lending to the MSME category,
and also includes new section i.e. Medium Enterprises which is defined as:
o
Manufacturing Sector: Investment in plant and machinery of Rs. 5 crores - Rs. 10 crores
FIntelligence 22 (April 28, 2015).
o

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Service Sector: Investment in equipment of Rs. 2 crores – Rs. 5 crores
While earlier bank lending to the MFIs that is used to on-lend to the MSME sector was eligible to
be classified under priority sector, specifying lending targets for this sector will further boost
bank lending to the MFIs.

Also, widening the scope of lending to the MSME sector by including medium enterprises under
the purview of priority sector lending will enable MFIs to cater to larger sized businesses
(provided the large ticket size loans are within the purview of “qualifying assets” as defined by
RBI) and get the benefit of priority sector loan.
3. Social Infrastructure

Bank loans up to a limit of Rs. 5 crore per borrower for building social infrastructure for activities
namely schools, health care facilities, drinking water facilities and sanitation facilities will now
qualify as priority sector lending.

As per recent guidelines by the RBI - Non-Banking Financial Company-Micro Finance
Institutions (NBFC-MFIs) – Directions – Modifications, the aggregate amount of loans given
for income generation was brought down from 70% to 50% of the total loans. This implies that
the MFIs can lend half of its portfolio to the borrowers for other purposes such as housing
repair, housing modification education, medical expenses, etc.

While many MFIs provide loans for water and sanitation purposes like building bathrooms, and
building drinking facility, it will now qualify under priority sector lending. This will encourage the
MFIs to increase its non-income generating portfolio while providing credit to its borrowers and
also consequently improving the social standard of living.
4. Bank Loans to MFIs
The new priority sector guidelines for bank loans to the MFIs have now been aligned with the recent
RBI guidelines on Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) –
Directions – Modifications.
The modified guidelines have been highlighted below in comparison to the previous year regulation
for PSL.
FIntelligence 22 (April 28, 2015).
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23rd April, 2015
Aggregate amount of loan, extended for income
1st July, 2014
Aggregate amount of loan, extended for income
generating activity, should be not less than 50% of
generating activity, is not less than 70% of the total
the total loans given by MFIs.
loans given by MFIs.
Qualifying Asset:
 Loan is to be extended to a borrower whose
household annual income in rural areas does
not exceed Rs. 1,00,000/- while for non-rural
areas it should not exceed Rs. 1,60,000/ Loan does not exceed Rs. 60,000/- in the first
cycle and Rs. 100,000/- in the subsequent
cycles
 Total indebtedness of the borrower does not
exceed Rs. 1,00,000
Qualifying Asset:
 Loan is to be extended to a borrower whose
household annual income in rural areas does
not exceed Rs. 60,000/- while for non-rural
areas it should not exceed Rs. 1,20,000/ Loan does not exceed Rs. 35,000/- in the first
cycle and Rs. 50,000/- in the subsequent
cycles.
 Total indebtedness of the borrower does not
exceed Rs. 50,000/-.
The consensus opinion of the change in regulations is that the RBI has provided a significant boost to
the MFI sector as it provides for portfolio growth, widening coverage and improvement in operating
efficiency.
Increase in the debt ceiling has been a long standing demand from MFIs as the old ceiling of Rs.
50,000 was fixed in 2011, and has not been adjusted for inflation since then. India Ratings had
pointed out in its report dated April 15, 2015, that agricultural and non-agricultural rural wages have
increased by 70% and 100%, respectively since January 2011. From an MFI’s growth point of view,
the aggregate loan portfolio can be potentially doubled by only increasing the loan size to the
existing microfinance borrowers (i.e., without expanding their coverage), apart from the higher
amount of consumption loans (medical and education purposes) that can be provided to existing
borrowers.
Another important relaxation allowed by the RBI is to reduce the share of income generating loans
to 50% of an MFI’s loan portfolio from 70% earlier. As these measures could potentially increase the
share of consumption loans in the portfolio, it would be important to build in some credit checks in
the loan appraisal process as the viability of the JLG model at these loan sizes has not been tested in
India.
5. Monitoring of Priority Sector
FIntelligence 22 (April 28, 2015).
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The recent PSL guidelines also specifies that going forward the monitoring on compliance for banks
on priority sector targets will be done on more frequent basis i.e. quarterly (instead of yearly) and
the banks will have to publish the information of its priority sector advances on both quarterly as
well as annual basis in the reporting format, which will be shortly notified.
The funding for the MFIs by the banks has till date mostly been seasonal, as the banks rush in the
last quarter of the financial year to meet their yearly PSL target. Due to this, majority of the bank
lending to the MFIs primarily flowed only in the last quarter of the financial year, leaving the MFIs to
look for other sources of funding through the rest of the year. Also, the MFIs would be flushed with
funds at the end of the quarter that some of the MFIs had a negative cash carry impact on the
financials.
With the quarterly compliance on the PSL reporting for the banks, this will reduce the seasonality in
funding and may ensure credit flow to the MFI sector on a regular basis through the year. Also, with
the widened scope of the priority sector, it provides further flexibility for the banks in meeting the
PSL norms.
The changes introduced by RBI are largely positive for the sector and will herald a strong medium
term growth in MFIs’ portfolio. Given the current state of affairs, the potential for growth and
penetration is significant and all stakeholders – borrowers, investors, regulators, government –
would like to witness cautious and responsible growth by MFIs.
You can find the detailed PSL guidelines here.