CII suggests changes in Priority sector lending norms

Context: The Confederation of Indian Industry (CII) has proposed reforms in the Priority-sector lending (PSL) framework suggesting inclusion of emerging sectors and high-impact sectors like digital infrastructure, green initiatives, healthcare and innovative manufacturing into the PSL framework.

What is Priority sector lending?

• Priority sector lending is a practice of lending a certain portion of a bank’s funds to specific sectors of the economy identified as priority sectors by regulatory authorities.
• The policy tool is aimed at ensuring that key sectors crucial to the nation’s development receive adequate financial support or credit.
• These sectors include- Agriculture and allied sectors, MSME, Export credit, Education, Housing, Social Infrastructure, Renewable Energy etc. 

Also Read: Priority Sector Lending 

Needs to reform PSL framework:

• Change in sectoral dynamics: The sector dynamics like contribution in GDP has changed with time. For instance, Traditional sectors like agriculture have seen a reduction in their GDP contribution to 14% now, while PSL allocations to the sector remain at 18 percent. So, a recalibration in the PSL framework is needed to reflect current economic reality. 
• Requirements of sunrise sectors: Sectors like green energy, and digital infrastructure lack funding opportunities, therefore they require inclusion in the PSL for credit flow. 
• Learnings from globe: Nations like Brazil and Indonesia provide cheap and priority loans to emerging sectors like green initiatives. 
• Fostering promising growth: Providing PSL to sectors like digital infrastructure can ensure sustainable returns to the banks due to their profitable nature. 

Issues in PSL reforms:

• Vulnerable sectors: Various sectors like agriculture and small industries sectors are already less attractive for banks. Changes in the PSL norms will negatively impact funding in these sectors. 
• Exploring alternatives: Sectors like digital infrastructure are attractive for private investors and venture capitalists due to their scope and productivity. So, alternate funding mechanisms can be explored for them, without tapping into PSL. 
• Possible public resistance: The change in norms may be perceived as an anti-welfarist approach leading to opposition and backlash. 
• Uncertain potential: Emerging sectors like green initiatives lack proper research and their economic potential might be overestimated. This may lead to the issues in recovery of loans. 

Way Forward

• Reducing stagnant sector share: Stagnant and reducing sectors like agriculture need to be rationalised, while alternate mechanisms like private financing can be explored for these sectors. 
• Phased implementation: PSL norms need to be transformed in a phased manner by analysing the long-term and short-term impacts on the various stakeholders. 
• Pushing for holistic reforms: A holistic approach needs to be devised to enhance funding in emerging sectors. Liberalising the bond market and promoting private financing can be explored in this regard. 

Way Forward: Priority sector norms are crucial to give a boost to the unserved and underserved sectors of the economy. But, reforms in PSL are crucial to keep the pace with economic dynamics, emerging opportunities and transforming social setup. Though these reforms need to be in a phased manner and should be extensively consulted with stakeholders.