NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, April 7, 2015

Indian banking regulator has proposed to hike the eligibility criteria to classify a loan as priority sector lending (PSL) which is expected to particularly boost microfinance institutions (MFIs) in the country.

In the monetary policy statement released on Tuesday the Reserve Bank of India (RBI) set out new measures to be taken for strengthening the banking structure, broadening and deepening financial markets, and extending the reach of financial services to all.

The RBI has been focusing on the PSL segment to improve access to finance to the poor in India. Banks are currently required to maintain a certain portion of their lending under PSL category.

RBI had constituted an Internal Working Group to revisit the PSL guidelines. The group had recommended inclusion of social infrastructure within the ambit of PSL targets and introduction of tradable PSL certificates.

The central bank noted that it is now going to revise upwards the limits relating to total indebtedness of the borrower, eligible rural and semi-urban household annual incomes and loan amounts to be disbursed in the first cycle and subsequent cycles. The new guidelines proposed by the RBI revises the limit for total borrowed loans and disbursement of loans to almost double the amount in all the cases.

The total indebtedness of a borrower, excluding educational/medical expenses, eligible for PSL status would be hiked to Rs 1 lakh (against the current limit of Rs 50,000).