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Priority Sector Lending & NPA

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.

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 TypePSL 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 Banks75% of ANBC
Small Finance Banks75% 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.

CategoryDefinition
Sub-standard AssetNPA for less than 12 months
Doubtful AssetNPA for more than 12 months
Loss AssetNPA 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