The origins of priority sector (PS) lending can be traced back to 1966 when Morarji Desai saw a need for increasing credit to agriculture and small industries. However, the definition for PS was only formalised based on a Reserve Bank of India (RBI) report in the National Credit Council in 1972. After bank nationalisation, the PS formulation also allowed Indira Gandhi to assuage important political lobbies, in a poor country with full adult franchise, through such directed lending.
The Priority Sector definition grew over time, and was not just limited to important lobby groups, but extended to cover important neglected sectors of the economy. But despite the tweaks, the classification retains a heavy focus on agriculture and small industries (defined as micro, small and medium enterprises or MSME) till today.
PS includes eight identified sectors. The biggest is agriculture with an 18% target of total ANBC. The other important category is MSMEs. In addition, five sectors are classified as PS — housing, export credit, education, social infrastructure and renewable energy.
Social infrastructure has lending caps and covers loans up to a limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities, including construction/ refurbishment of household toilets, and water improvements at the household level. It also covers loans up to a limit of ₹10 crore per borrower for building health care facilities in Tier II to Tier VI centres. The education category covers loans for study or vocational courses. Further, these targets must include 12% loans to defined weaker sections, 7.5% to micro enterprises, and 10% of the agriculture target is for small and marginal farmers.
This formulation needs a rethink. First, it is shocking that health is only a sub-category of social infrastructure with a ₹10 crore limit for building hospitals. This needs to be a large independent category where we encourage “right size” not “small size” hospitals — big in urban centres but smaller outside.
Second, the need to create institutions for training nurses, health technicians, and health machine operators, and more broadly for training in basic technology and digital applications is dire. Tata chairman N Chandrashekharan has captured this wonderfully in his book Bridgital Nations.
Third, educational infrastructure has a low credit limit of ₹5 crore. Finally, loans for purchase of computers and smart phones for low income categories should also be considered as part of PS lending.
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