science

Priority Sector Lending Certificates

Priority Sector Lending Certificates is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Priority Sector Lending Certificates rather than just read about it. In short: Priority Sector Lending Certificates are a tool for promoting comparative advantages among banks while they meet their priority sector lending obligations in India. "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]…

Key takeaways

Priority Sector Lending Certificates belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Priority Sector Lending Certificates to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Priority Sector Lending Certificates from memory before moving on to harder problems.

Reference excerpt

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

Types As priority sector lending has sub-targets in addition to an overall target there are types of Priority Sector Lending Certificates (PSLCs). The four types of Priority Sector Lending Certificates are:

PSLC Agriculture: Priority Sector Lending Certificates for agriculture lending sub-target. PSLC SF/MF: Priority Sector Lending Certificates for small and marginal Farmers lending sub-target. PSLC Micro Enterprises: Priority Sector Lending Certificates for micro enterprises lending sub-target. PSLC General: Priority Sector Lending Certificates corresponding to the overall priority sector lending target. Additional types of Priority Sector Lending Certificates would be required for other lending sub-targets.

Non-Transfer of credit risk and consistent use with inter-bank participation certificates and securitization The selling or purchase of Priority Sector Lending Certificates does not cause a transfer of credit risk as Priority Sector Lending Certificates do not cause any change in the lender of any loan i.e. the lender is not replaced. Priority Sector Lending Certificates is different from Securitization as the latter involves a transfer of credit risk. "Priority Sector Lending Certificates [Social credits] may be used in conjunction with inter-bank Participation Certificates or securitization of priority-sector lending portfolios".

Market-based pricing Priority Sector Lending Certificates "would be priced by the market. The basic framework for pricing Priority Sector Lending Certificates [social credits] would incorporate the risk-free rate, default rate and cost of operations." As Priority Sector Lending Certificates are priced based on credit risk hence it is a type of credit derivative. IndiaRatings "expects the PSLCs to be priced between 1 per cent to 3 per cent...depending on the PSL sub-segment deficit of the buyer". Alternative pricing models would be based on the price of penalties if the price of penalties is lower than what the price would be otherwise. In order to avoid a scenario wherein banks prefer to pay penalties rather than comply with priority sector lending obligations the imposition of "large monetary fines and/or partially revoke banking licences if a bank does not reach its targets" is required. If and when "the price of a Priority Sector Lending Certificate [social credit] is close to zero consistently, then we know that targets are not needed" The cost of operations related to priority sector lending may make a significant part of the price of Priority Sector Lending Certificates. Government "can intervene by buying the Priority Sector Lending Certificates [social credits] in the market this would push up the price. " Market based pricing of Priority Sector Lending Certificates induces a "market-driven incentive for efficiency". In the first quarter year of 2016-17 Priority Sector Lending Certificates were traded at a premium in the range of 3-5 per cent.

Lot size and amount eligible for issue "The Priority Sector Lending Certificates would have a standard lot size of INR 2.5 million of multiples thereof...Normally PSLCs will be issued against the underlying assets. However, with the objective of developing a strong and vibrant market for PSLCs, a bank is permitted to issue PSLCs upto [sic] 50 percent of previous year’s PSL achievement without having the underlying in its books. However, as on the reporting date, the bank must have met the priority sector target by way of the sum of outstanding priority sector lending portfolio and net of PSLCs issued and purchased." .

Expiry All Priority Sector Lending Certificates will expire by the end of the financial year. The same underlying priority sector loan which is outstanding in the next financial year, like any new priority sector loan, will be considered towards calculating the Priority Sector Lending Certificates in case the priority sector lending target is exceeded.

Rewards and Penalties "To the extent of shortfall in the achievement of target, banks may be required to invest in RIDF (Rural infrastructure development fund)/other funds as hitherto." Penalties are as essential as the carrot (of allowing banks to stay away from direct lending and taking credit risk in the priority sector; compensating those banks that exceed their priority sector lending target) and so the "carrot should be flanked by the stick."

Different from a cap and trade system Priority Sector Lending certificates have similarities with cap and trade systems like Carbon Credits. The similarities include: system level target and tradable nature of the credits. A major difference between Priority Sector Lending Certificates and carbon credits is in the nature of the targets: lending versus a negative externality (environmental pollution). The targets in the case of Priority Sector Lending Certificates are a floor and not a cap.

… excerpt ends here. Continue reading the full article.

Worked examples

Example 1 — a first encounter with Priority Sector Lending Certificates

Start with the simplest possible case. Write down what Priority Sector Lending Certificates claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Priority Sector Lending Certificates before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Priority Sector Lending Certificates ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Priority Sector Lending Certificates

In research: Priority Sector Lending Certificates appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Priority Sector Lending Certificates in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Priority Sector Lending Certificates is common in secondary-school and first-year university syllabi. It links to neighbouring topics Banking in India, Derivatives (finance), Development economics, so understanding it makes those chapters shorter.
In everyday life: Look for Priority Sector Lending Certificates outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Priority Sector Lending Certificates in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Priority Sector Lending Certificates means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Priority Sector Lending Certificates out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Priority Sector Lending Certificates in simple terms?

Why does Priority Sector Lending Certificates matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Priority Sector Lending Certificates?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Priority Sector Lending Certificates.