Topic 04 of 6 · Chapter 05 · Indian Economy
Priority Sector Lending & NPA
Priority sector categories, targets, Non-Performing Assets (NPA) problem, IBC 2016, and bank recapitalisation.
📋 In This Article
1. Priority Sector Lending (PSL)
Priority Sector Lending is a mandate by RBI that requires banks to lend a certain percentage of their loans to specified priority sectors.
| Bank Type | PSL Target |
|---|---|
| Domestic Commercial Banks & Foreign Banks (20+ branches) | 40% of Adjusted Net Bank Credit (ANBC) |
| Foreign Banks (less than 20 branches) | 40% of ANBC |
| Regional Rural Banks | 75% of ANBC |
| Small Finance Banks | 75% of ANBC |
Priority Sector Categories:
- Agriculture (18% of ANBC)
- Micro, Small and Medium Enterprises (MSMEs)
- Export Credit
- Education
- Housing
- Social Infrastructure
- Renewable Energy
- Others (weaker sections)
⭐ Priority Sector Lending Certificates (PSLCs): Banks that exceed PSL targets can sell PSLCs to banks that fall short. This creates a market mechanism for PSL compliance.
2. Non-Performing Assets (NPA)
A Non-Performing Asset (NPA) is a loan or advance where the borrower has not paid interest or principal for 90 days or more.
| Category | Definition |
|---|---|
| Sub-standard Asset | NPA for less than 12 months |
| Doubtful Asset | NPA for more than 12 months |
| Loss Asset | NPA identified as uncollectable; loss has been identified |
📌 India’s NPA Problem: India’s banking sector faced a severe NPA crisis in 2015-18. Gross NPA ratio peaked at ~11% of total loans. Public sector banks were worst affected. Causes: reckless lending during 2008-12 boom, economic slowdown, wilful defaulters.
✅ Solutions to NPA: (1) IBC 2016 — fast resolution of insolvencies; (2) Bank recapitalisation — government injected ₹2.11 lakh crore into PSBs; (3) Asset Reconstruction Companies (ARCs) — buy bad loans from banks; (4) SARFAESI Act — banks can seize assets without court order.
3. Insolvency and Bankruptcy Code (IBC) 2016
The IBC 2016 was a landmark reform to resolve insolvencies quickly and efficiently.
- Time-bound resolution: 180 days (extendable to 270 days)
- Creditors (banks) can initiate insolvency proceedings against defaulters
- National Company Law Tribunal (NCLT) handles cases
- Insolvency Resolution Professional (IRP) manages the company during resolution
- If no resolution, company goes for liquidation
💡 Impact of IBC: IBC has significantly improved India’s ranking in “Resolving Insolvency” in the World Bank’s Ease of Doing Business index. It has recovered over ₹3 lakh crore for creditors since 2016.
4. Key Points for Exam
🔑 Must-Remember Facts
- PSL target for domestic banks: 40% of ANBC
- PSL target for RRBs and SFBs: 75% of ANBC
- Agriculture sub-target: 18% of ANBC
- NPA = loan where borrower hasn’t paid for 90 days or more
- Three categories of NPA: Sub-standard, Doubtful, Loss
- IBC enacted: 2016
- IBC resolution time: 180 days (extendable to 270 days)
- IBC handled by: NCLT (National Company Law Tribunal)
- SARFAESI Act allows banks to seize assets without court order
- ARCs = Asset Reconstruction Companies — buy bad loans from banks