Topic 04 of 6 ยท Chapter 05 ยท Indian Economy
Priority Sector Lending & NPA
Priority sector categories, targets, Non-Performing Assets (NPA) problem, IBC 2016, and bank recapitalisation.
๐ 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)
โญ 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 |
๐ 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.
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Solutions to NPA: (1) IBC 2016 โ fast resolution of insolvencies; (2) Bank recapitalisation โ government injected โน2.11 lakh crore into PSBs; (3) Asset Reconstruction Companies (ARCs) โ buy bad loans from banks; (4) SARFAESI Act โ 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
๐ก 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 โน3 lakh crore for creditors since 2016.
4. Key Points for Exam
๐ 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 โ buy bad loans from banks