Government Banking Schemes and Priority Sector Lending
The Indian government’s financial inclusion agenda and its use of the banking system as a vehicle for delivering social welfare benefits represent one of the most distinctive features of India’s development model. For an IBPS PO candidate, understanding these schemes is essential not only for passing the examination but also for understanding how banks function as agents of social policy — extending credit to underserved populations, implementing government welfare programmes, and channeling subsidies to target beneficiaries. The IBPS PO examination tests these topics with greater analytical depth than the Clerk examination, often requiring candidates to understand the rationale, implementation challenges, and outcomes of these programmes.
Priority Sector Lending (PSL)
PSL is a mandatory requirement for all domestic scheduled commercial banks (including foreign banks with more than 20 branches in India) to lend a specified portion of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) to defined priority sectors.
Priority Sector Categories
| Category | Target for SCBs |
|---|---|
| Agriculture | 18% of ANBC |
| Small and Micro Enterprises (SMEs) | 10% of ANBC |
| Export Credit | 2% of ANBC (optional target) |
| Weaker Sections | 12% of ANBC |
| Education | Included in various categories |
| Housing | Included in SMEs/weaker sections |
| Others (social infrastructure, renewable energy) | Up to 5% |
Sub-targets:
- Agriculture: 8% for small and marginal farmers (SF/MF)
- Weaker Sections: Including SC/ST, minorities, women, disabled, persons with total disability ≥ 70%
- Differential Rate of Interest (DRI): 1% of ANBC must be lent to the weakest sections at concessional rates (currently 4% per annum)
Achievement and challenges: Many banks struggle to meet PSL targets, particularly in rural areas with limited creditworthy borrowers. The RBI has introduced Priority Sector Lending Certificates (PSLCs) — banks that exceed their PSL targets can sell PSLCs to banks that fall short, creating a market for priority sector credit.
Major Financial Inclusion Schemes
Pradhan Mantri Jan Dhan Yojana (PMJDY)
Launched on August 28, 2014, PMJDY is the world’s largest financial inclusion programme. Key achievements and features:
- 500+ million accounts opened
- Zero balance accounts permitted (though the government now encourages regular usage)
- RuPay Debit Card issued to every account holder
- Accidental insurance cover of ₹2 lakh (free)
- Life insurance cover of ₹30,000 (under PMJJBY, with government subsidy)
- Overdraft facility up to ₹10,000 after 6 months of satisfactory operation
- Direct Benefit Transfer (DBT): Government subsidies flow directly to Jan Dhan accounts, reducing leakage
Pradhan Mantri MUDRA Yojana (PMMY)
Launched April 8, 2015, PMMY provides credit to non-corporate, non-farm small and micro enterprises. Key features:
- Shishu: Loans up to ₹50,000 (most vulnerable)
- Kishore: Loans from ₹50,000 to ₹5 lakh
- Tarun: Loans from ₹5 lakh to ₹10 lakh
- MUDRA Card: A RuPay debit card allowing withdrawal of working capital
- No collateral required for loans up to ₹10 lakh
PMMY has been one of the most successful schemes — over 400 million loans have been sanctioned since launch, transforming India’s informal sector.
Pradhan Mantri Awas Yojana (PMAY)
PMAY-Urban was launched on June 25, 2015, with the goal of “Housing for All by 2022.” Its key component relevant to banking is the Credit Linked Subsidy Scheme (CLSS):
| Category | Annual Household Income | Subsidy on Loan Amount |
|---|---|---|
| EWS | Up to ₹3 lakh | 6.5% on ₹6 lakh |
| LIG | ₹3–6 lakh | 6.5% on ₹6 lakh |
| MIG I | ₹6–12 lakh | 4% on ₹9 lakh |
| MIG II | ₹12–18 lakh | 3% on ₹12 lakh |
PMAY-Gramin (rural) provides for the construction of pucca houses with government assistance.
Kisan Credit Card (KCC)
The KCC scheme provides affordable credit to farmers. Expanded in 2019 to cover:
- All farmers (individual/joint owners)
- Tenant farmers, sharecroppers
- Fishermen and animal husbandry farmers (in addition to crop farmers)
Features:
- Credit limit based on landholding and cropping pattern
- Interest rate: Subvented rate (~4% for short-term crop loans up to ₹3 lakh, subject to prompt repayment)
- Collateral-free credit up to ₹1.60 lakh
- RuPay KCC card for ATM withdrawals
Priority Sector Lending Certificates (PSLCs)
PSLCs were introduced by the RBI in 2016 to address the problem of banks being unable to meet PSL targets due to geographic constraints (e.g., a bank with branches in urban areas may find it difficult to find enough creditworthy agricultural borrowers).
Mechanism: A bank that has exceeded its PSL targets in a category (e.g., agriculture) can purchase a PSLC-Agriculture from the RBI’s portal. The purchasing bank counts this as having extended agricultural credit; the selling bank receives a fee but reduces its PSL achievement in that category.
Categories: PSLC-Agriculture, PSLC-SME, PSLC-Weaker Sections, PSLC-Others.
Debt Relief and NPA Management
One Time Settlement (OTS)
Banks offer OTS schemes periodically to resolve NPAs by accepting a lump sum settlement that is less than the full outstanding amount. This is particularly used for small borrowers who cannot pay the full amount but can pay a substantial portion.
SARFAESI Act, 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act empowers banks and financial institutions to:
- Seize and sell mortgaged properties without court intervention when a borrower defaults (for NPAs above ₹100 crore or 20% of the bank’s assets, whichever is lower)
- Form Asset Reconstruction Companies (ARCs) to acquire and manage NPAs
- This significantly accelerated NPA recovery and reduced the time taken to resolve defaults
Insolvency and Bankruptcy Code (IBC), 2016
The IBC is India’s landmark insolvency and bankruptcy legislation. Key features:
- Provides a time-bound process (330 days including litigation) for resolving corporate insolvency
- Allows creditors to initiate proceedings against defaulting companies (financial creditors can directly approach NCLT; operational creditors can also approach NCLT)
- The Resolution Professional manages the company during the moratorium period
- Resolution Plan: A going-concern or liquidation value maximization plan is approved by the Committee of Creditors (CoC)
- NCLT (National Company Law Tribunal): The adjudicating authority for corporate insolvency
- IBC has recovered approximately ₹3.5 lakh crore from more than 500 resolution cases since its inception
Notable cases resolved under IBC: Bhushan Steel, Bhushan Power & Steel, Essar Steel, Jaypee Infratech, IL&FS (infrastructure Leasing & Finance Corporation — India’s largest NBFC crisis).
Small Finance Banks and Payments Banks
Small Finance Banks (SFBs)
SFBs were licensed by the RBI in 2014 to serve the financially unserved and underserved sections. Unlike banks, they:
- Cannot lend to large corporations
- Have a cap on maximum individual loan size
- Must invest 75% of their ANBC in priority sector loans
Examples: Ujjivan SFB, AU SFB, Equitas SFB, Suryoday SFB.
Payments Banks
Payments Banks were licensed to increase financial inclusion by offering:
- Small savings accounts (maximum balance of ₹1 lakh)
- Payment and remittance services
- Digital banking services
They cannot lend or issue credit cards. Examples: Paytm Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank.
⚡ Exam tip: PSL target for agriculture is 18% of ANBC; 8% specifically for small and marginal farmers. PMJDY was launched on August 28, 2014. MUDRA loans are Shishu (₹50K), Kishore (₹50K–5L), Tarun (₹5L–10L). SARFAESI allows banks to seize collateral without court intervention. IBC provides 330-day resolution timeline. PSLCs allow banks to trade PSL achievements. DRI requires 1% of ANBC lent at 4% to the weakest sections.
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