PRIORITY SECTOR LENDING CERTIFICATES (PSLC)

Priority Sector Lending Certificates is a tool for promoting comparative advantages among banks while they meet their priority sector lending obligations in India

- Arun Kumar Gupta

Introduction:

"Banks with a comparative advantage in lending to the priority sector should earn priority sector lending certificates [social credits] while those falling short of the target would be required to buy priority sector lending certificates [social credits]. A forward market for Priority Sector Lending Certificates [social credits] will help banks to focus and plan well.

Total credit extended by banks in priority sector lending was INR 21,543,562.9 million (US$322,361 million as of June 2016) towards the end of financial year 2015. The goal of Priority Sector Lending Certificates is to create market efficiency in priority sector lending "to increase employment, create basic infrastructure and improve competitiveness of the economy, thus creating more jobs. Priority Sector Lending Certificates is a method for directing credit and could be used in Asia and other parts of the world as an alternative method for directing credit.

Background:

Tradable Priority Sector Lending Certificates was first proposed by Mr. A. M. Godbole in his article "How to lend more to the poor" (Mint, 28 March 2007). Mr. A. M. Godbole had called tradable Priority Sector Lending Certificates as 'social credits'. On 7 April 2008 (in a draft report) and on 12 September 2008 (in a final report) the High-Level Committee on Financial Sector Reforms recommended the introduction of Priority Sector Lending Certificates. On 7 April 2016 the portal for trading Priority Sector Lending Certificates was launched by the Reserve Bank of India. Within twelve months of the launch of the Priority Sector Lending Certificates portal for trading, a total of INR 430.1 billion (US$6.63 billion as of 31 March 2017) of PSLC SF/MF and PSLC General by volume was traded.

Types: