CII Recommendations for India’s Priority Sector Lending Framework

CII’s Call for Reforms in PSL Framework

The Confederation of Indian Industry (CII) has proposed reforms in India’s Priority Sector Lending (PSL) framework and has asked for more Development Finance Institutions (DFI).

The Importance of Priority Sector Lending

Priority Sector Lending (PSL) is a vital policy tool in India, aimed at ensuring that key sectors crucial to the nation’s development receive adequate financial support. Mandated by the Reserve Bank of India (RBI), PSL obligates banks to allocate a specified proportion of their loans to sectors such as agriculture, education, housing, and small industries. The framework ensures equitable credit distribution, contributing to the socio-economic growth of underserved areas.

The Need for Regular Recalibration

Despite its massive success, the PSL framework requires regular recalibration to remain relevant. This recalibration is essential to ensure that the financial resources are optimally distributed, in harmony with our vision of Viksit Bharat 2047, CII said in its release here today.

Challenges in the Current Framework

For instance, while agriculture contributes 14 percent of the GDP today, its PSL allocation remains at 18%, unchanged from when its GDP share exceeded 30 percent. Similarly, sectors like infrastructure and innovative manufacturing lack adequate PSL focus despite their potential to drive economic growth, CII has pointed out.

Shifting Economic Priorities

India’s economy has evolved rapidly over the past few decades, with employment focus shifting to newer sectors because of increased education levels in the society and higher disposable incomes.

The Case for Framework Review

Sectors like agriculture have reduced contribution to GDP from 30% in 1990s to about 14% now. Hence, it is time that Priority Sector Lending (PSL) framework be reviewed every 3-4 years to align based on emerging priorities and PSL allocations should be in line with GDP contributions and sectoral growth potential. For instance, we could look at inclusion of Emerging and High-Impact Sectors, including digital infrastructure, green initiatives, healthcare, and innovative manufacturing.

Proposed Sectors for PSL Inclusion

Green Initiatives: Including green energy projects, electric vehicles, and climate-resilient agriculture;

Digital Infrastructure: Prioritize funding for sectors like digital technologies, artificial intelligence, etc.

Healthcare: Allocate funds for healthcare innovation

CII has further pointed out that besides the above sectors, Infrastructure and manufacturing are poised to make substantial contributions to India’s economic growth.

The Role of Development Finance Institutions (DFIs)

The current Development Finance Institutions like SIDBI and NABFID have their roles cut out as they have earmarked sectors to finance. Therefore, CII has suggested setting up of a high level committee to look at the revision of Priority Sector Lending norms and also explore the need for any new DFIs to cater to some of the new and emerging sectors.

Transition to Outcome-Based Metrics

The CII recommendation is that of transition to Outcome-Based Metrics, where the focus needs to shift from absolute lending targets to measurable developmental outcomes, ensuring impact-driven credit distribution.