Priority Sector Lending Certificates (PSLCs) Explained

Priority Sector Lending Certificates (PSLCs) explained in simple way for bank promotion exams and interviews.

Purpose and Nature of Priority Sector Lending Certificates (PSLCs)

• Purpose:
  • These certificates help banks to meet the targets set for lending to important sectors of our economy, i.e, Priority Sector.
  • Banks that lend more than the required amount to these sectors are rewarded.
  • This system encourages banks to lend more money to these important sectors.
• Nature:
  • These certificates are for transferring the fulfillment of lending obligations, not the actual loans or the risks associated with those loans.
  • The bank that has lent more sells the fulfillment, and the bank that needs to meet its targets buys the fulfillment.

Operational Modalities of Priority Sector Lending Certificates (PSLCs)

• Trading Platform:
  • The Reserve Bank of India (RBI) uses its computer system, called e-Kuber, for trading these certificates.
  • Detailed instructions are available on the e-Kuber system.
• Eligible Participants:
  • The following banks can participate:
    • Scheduled Commercial Banks (SCBs)
    • Regional Rural Banks (RRBs)
    • Local Area Banks (LABs)
    • Small Finance Banks (SFBs)
    • Urban Co-operative Banks

Types of Priority Sector Lending Certificates (PSLCs)

• PSLC Agriculture:
  • This certificate represents loans given to agriculture, except for small and marginal farmers.
  • It counts towards the agriculture target and the overall lending target.
• PSLC SF/MF (Small and Marginal Farmers):
  • This certificate represents loans given to small and marginal farmers.
  • It counts towards the sub-target for small and marginal farmers, the agriculture target, and the overall lending target.
• PSLC Micro Enterprises:
  • This certificate represents loans given to small businesses.
  • It counts towards the sub-target for small businesses and the overall lending target.
• PSLC General:
  • This certificate represents other loans that qualify for the lending targets, excluding agriculture and small businesses.
  • It counts towards the overall lending target.

Computation and Achievement of Priority Sector Lending Certificates (PSLCs)

• PSL Achievement:
  • A bank’s achievement is calculated by adding the total amount of outstanding loans to the net value of the certificates it has bought or sold.
  • This calculation is done separately for each sub-target.
• Issue Eligibility:
  • Generally, certificates are issued against actual loans given.
  • A bank can issue certificates for up to 50% of its previous year’s achievement without having actual loans.
  • The bank must meet its lending target on the reporting date.
  • If a bank does not meet its targets, it may have to invest money in special funds.

Key Features of Priority Sector Lending Certificates (PSLCs)

• Credit Risk:
  • The risk of the loan not being repaid is not transferred with the certificate.
• Expiry:
  • The certificates expire on March 31st.
  • They are not valid after the reporting date.
• Settlement:
  • The transactions are done through the e-Kuber system.
• Value and Fee:
  • The value of the certificate is equal to the amount added or subtracted from the lending achievement.
  • The fee for the certificate is determined by the market.
  • Lot Size:
    • The minimum transaction is Rupees 25 lakh, and transactions must be in multiples of this amount.
• Accounting:
  • The fee paid is recorded as an expense.
  • The fee received is recorded as miscellaneous income.
• Disclosures:
  • Banks must show the categories of certificates they have bought and sold in their financial reports.

Examples and Illustrations

• Example 1:
  • Bank A sells a certificate worth Rupees 100 crore to Bank B on July 15, 2016.
  • Bank B adds Rupees 100 crore to its lending achievement for the reporting dates of September 30, December 31, and March 31.
  • Bank A subtracts Rupees 100 crore from its lending achievement.
  • The certificate expires on March 31, 2017.
• Example 2:
  • Bank C buys a certificate worth Rupees 100 crore from Bank D on March 30, 2017.
  • Bank D subtracts Rupees 100 crore from its lending achievement on March 31, 2017.
  • Bank C adds Rupees 100 crore to its lending achievement on March 31, 2017.
  • The certificate expires on March 31, 2017.

 FAQs on Priority Sector Lending Certificates (PSLCs)