Mains Practice Questions

Approach

• Start the answer by briefly discussing what Public Sector Lending (PSL) is.
• Discuss the need to review the PSL.
• Conclude Suitably.

Introduction

Under Public Sector Lending, the RBI mandates banks to lend a certain portion (40% of their Adjusted Net Bank Credit (ANDC)) of their funds to specified sectors, like agriculture, MSMEs, export credit, education, housing, social infrastructure, renewable energy among others. However, there are many issues pertaining to PSL that demand the revision.

Body

Associated Issues With the PSL

• High Burden of NPAs: 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.
  • The banks lending to these categories have double digit non-performing assets (NPA) in their loan portfolios, making the sector economically unviable for them.
  • The banks then have to set aside the capital to account for assets that might be decreased due to NPAs which erodes the profitability of the banks.
• Problem of Moral Hazard: Granting loans to this borrower segment with the high probability of NPAs creates corruption opportunities for bank managers and creates moral hazards for the identified beneficiaries.
• Economic Burden of Banks: PSL diverts funds from the productive sectors, imposes economic burdens on the banks in the form of loan losses and payment defaults and also imposes opportunity costs of lending to non-priority sectors of the economy.
• Capping Issues: Educational infrastructure has a low credit limit of ?5 crore. Also, health is only a sub-category of social infrastructure with a ?10 crore limit for building hospitals.

Way Forward

• PSL to Grants: Converting some part of PSL to a grant paid directly by the government can unlock large amounts of efficiency in the system, and dramatically increase the valuation of public sector banks also.
• Leveraging JAM for Social Development: The full possibilities of JAM (full access to Jan Dhan accounts, universal Aadhaar numbers and near-universal mobile penetration) can address the issues that PS lending cannot achieve.
  
  • For example, JAM can institutionalise the functioning of direct benefit transfers (DBT).
• Increasing Quota of Social Infrastructure: Covid-19 has forced us to re-examine many things from the past. The importance of health and education infrastructure has been sharply highlighted.
  • Thus, PSL should be restructured to prioritize formation of social infrastructure.

Conclusion

The scheme of PSL (the fixation of the targets and the sub-targets) must be structured according to the type of bank along with various other considerations such as branch availability and the willingness of the bank to lend to a particular sector.