Priority Sector
Lending (PSL) plays a crucial role in promoting inclusive growth and ensuring
the equitable distribution of credit in India. In 2020, the PSL targets for
Urban Cooperative Banks (UCBs) were revised to further enhance their
contribution to priority sectors. To facilitate a smooth transition and address
implementation challenges, the Reserve Bank of India (RBI) has made significant
adjustments to the PSL framework, extending the timeline for achieving the
revised targets and introducing incentives for UCBs that meet the prescribed
goals.
Revised PSL Targets and Transition Period
To align with
the changing economic landscape, the RBI revised the PSL targets for UCBs in
2020. Initially, a glide path was established until March 31, 2024, to enable
UCBs to gradually achieve the new targets. However, considering the challenges
faced by UCBs during the transition, the RBI has extended the phase-in time by
an additional two years. This means UCBs now have until March 31, 2026, to meet
the revised PSL targets.
Incentives for UCBs Meeting PSL Targets
To incentivize
UCBs that meet the prescribed PSL targets, the RBI has announced that suitable
incentives will be provided to those banks that have achieved the targets by
March 31, 2023. While the specifics of these incentives will be outlined in a
separate circular, it signifies the RBI's commitment to recognizing and
rewarding UCBs that prioritize lending to priority sectors.
Rural Infrastructure Development Fund
(RIDF) Contribution
Previously, UCBs
were advised to contribute to the Rural Infrastructure Development Fund (RIDF)
or other eligible funds with NABARD (National Bank for Agriculture and Rural
Development) and other financial institutions against their PSL shortfalls.
However, in light of observed implementation challenges, the RBI has made the
following changes:
UCBs are
exempted from contributing to RIDF or other eligible funds for their PSL
shortfalls during the financial years 2020-21 and 2021-22.
UCBs will resume
contributing to RIDF and other eligible funds for their PSL shortfalls from
March 31, 2023.
If any UCB made
contributions towards PSL shortfalls during the financial years 2020-21 and/or
2021-22, those contributions can be used to offset any shortfalls that may have
occurred during the financial year 2022-23. Any excess deposit after offsetting
the PSL shortfall during FY 2022-23 will be refunded.
The RBI's
decision to revise the PSL targets for UCBs and provide an extended timeline
for their implementation reflects the central bank's commitment to facilitating
a smooth transition and addressing challenges faced by UCBs. By incentivizing
UCBs that meet the PSL targets and adjusting the contribution requirements for
PSL shortfalls, the RBI aims to strike a balance between promoting inclusive
growth and ensuring the stability of the banking sector.
As UCBs continue
to play a vital role in providing credit to priority sectors, these changes
offer a more flexible framework for UCBs to fulfill their obligations while
considering the unique circumstances they face. The RBI's efforts will not only
support the growth of UCBs but also contribute to the overall development and
inclusivity of the Indian economy.
