Priority Sector Lending Certificates

Also called: PSLC · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT

Meaning

A Priority Sector Lending Certificate (PSLC) is a certificate that one bank sells to another. It passes on only the credit for meeting a priority sector lending (PSL) target. The loan and its credit risk (the risk that the borrower does not repay) stay with the bank that made it [3].

• A bank that lends more than its PSL target can sell the extra as PSLCs to a bank that is short of its target.
• PSLCs matter because they let the whole banking system meet its social lending targets at lower cost. Banks that are good at rural lending do more of it and earn a fee for it.

Explanation

How a PSLC works

• Seller: a bank that has made PSL-eligible loans, usually more than its target requires.
• Buyer: a bank that has fallen short of its target or a sub-target.
• What moves: only the "credit" towards the target.
• What does not move:
• No loan and no credit risk is transferred. In the RBI's words, there is "no transfer of credit risk on the underlying as there is no transfer of tangible assets" [3].

• The original loan stays in the seller's books.

• Platform: PSLCs are traded on the RBI's e-Kuber platform, which also settles the money [3].

• Selling limit: a bank can sell PSLCs worth up to 50% of its previous year's PSL achievement, even if it has no extra loans in its books to back them [3].
• Lot size: ₹25 lakh and multiples of it [1].

The four types of PSLC [3]

PSLC type	Counts towards
PSLC-Agriculture	Agriculture target + overall PSL target
PSLC-SF/MF	Small/marginal farmer (SMF) sub-target + agriculture target + overall PSL target
PSLC-Micro Enterprises	Micro-enterprise sub-target + overall PSL target
PSLC-General	Overall PSL target only

• PSLC-SF/MF is the most useful type. It counts towards three targets at once.
• PSLC-General is the least useful. It counts only towards the overall 40% target.

Price, accounting and expiry

• Price: the market sets the price, not the RBI. The buyer pays the seller a fee called a premium [3].
• Accounting:
• The buyer records the premium as an expense.

• The seller records it as miscellaneous income [3].

• Expiry: every PSLC lapses on 31 March, the last day of the financial year [3].

• So a bank cannot store PSLCs and use them in a later year.

• What pushes the price up or down (textbook logic):

• If many banks are short of a sub-target, such as SMF, demand for that type of PSLC rises. Its premium goes up.
• If banks with strong rural reach have a large surplus, supply rises and the premium falls.

Why a bank buys a PSLC: a worked example

• The penalty for missing a target: a bank that falls short must deposit the shortfall in the RIDF (Rural Infrastructure Development Fund), run by NABARD. These deposits earn low interest [1]:
• Shortfall below 5 percentage points → Bank Rate − 2%
• 5 to 10 percentage points → Bank Rate − 3%
• 10 percentage points or more → Bank Rate − 4%
• Missed only a sub-target → Bank Rate − 2%

• (Bank Rate is the rate at which the RBI lends to banks over a longer period.)

• Example:

• An RRB lends ₹200 crore more to small farmers than its target requires.
• A foreign-owned bank is ₹200 crore short on its SMF sub-target.
• The RRB sells ₹200 crore of PSLC-SF/MF to the foreign-owned bank at a 1.5% premium.
• Premium = 1.5% × ₹200 crore = ₹3 crore. The RRB books this as income.
• The foreign-owned bank meets its SMF sub-target, its agriculture target and part of its overall target. It pays ₹3 crore instead of locking up ₹200 crore in RIDF at a low return.

In India

• Regulator: the Reserve Bank of India (RBI) introduced PSLCs through its circular of 7 April 2016 [3].
• Trading platform: RBI's e-Kuber [3].
• Who can trade: Scheduled Commercial Banks, Regional Rural Banks (RRBs), Local Area Banks, Small Finance Banks (SFBs) and Urban Co-operative Banks (UCBs) that have made PSL-eligible loans [3].
• Rule behind the targets: the PSL Master Directions, 2025. They came into force on 1 April 2025 and replaced the 2020 Directions. The RBI last updated them on 11 September 2026 [1].
• Targets that create demand for PSLCs (2025 Directions) [1]:
• Domestic commercial banks: 40% of ANBC or CEOBE, whichever is higher.
  • ANBC (Adjusted Net Bank Credit) is a bank's total loans after some fixed adjustments.
  • CEOBE (Credit Equivalent of Off-Balance-Sheet Exposure) turns promises such as guarantees, which are not loans on the balance sheet, into an equal loan amount.
• Within the 40%: agriculture 18%, of which SMF 10%; micro enterprises 7.5%; weaker sections 12%.
• RRBs 75%, SFBs 60% (earlier 75% under the 2019 Master Direction [4]), UCBs 60%.

• Foreign banks: 40%, whether they have 20 or more branches or fewer than 20.

• Typical sellers and buyers:

• Sellers are lenders with deep rural reach, such as RRBs and SFBs. Their high targets and local networks often leave them with a surplus.

• Buyers are banks with little rural presence, such as foreign and some private banks.

• Monitoring: the RBI checks every quarter whether banks meet their targets [4].

Don't confuse with

• Co-lending: here a bank and an NBFC jointly fund a real loan and share its risk. Each partner keeps at least 10% of every loan under the 2025 Directions [2]. In a PSLC, no loan is funded or shared. Only target credit moves.
• RIDF deposit: this is the penalty route. A bank that misses its target deposits the shortfall with NABARD at Bank Rate minus 2–4% [1]. A PSLC is the market route for avoiding that penalty.
• On-lending: a bank lends to NBFCs or HFCs, which then lend to priority borrowers. This counts as PSL up to 5% of the bank's total PSL in the previous year [1]. On-lending creates a real loan. A PSLC does not.
• Sale or transfer of loans: a loan sale moves the asset and its credit risk to the buyer. A PSLC moves neither [3].

Prelims Hooks

• PSLCs were launched by the RBI circular of 7 April 2016 and are traded on e-Kuber [3].
• No loan and no credit risk is transferred. The underlying loan stays with the seller [3].
• There are four types. PSLC-SF/MF counts towards three targets (SMF, agriculture and overall). PSLC-General counts only towards the overall target [3].
• Trap: the premium is market-determined, not fixed by the RBI. The buyer books it as an expense and the seller as miscellaneous income [3].
• All PSLCs expire on 31 March, so they cannot be carried forward. A bank can sell up to 50% of its previous year's PSL achievement [3]. The lot size is ₹25 lakh [1].
• Trap: the RIDF, where shortfalls are deposited, is run by NABARD, not SIDBI.

Mains Points

• A market-friendly fix for directed lending:
• PSL forces banks to lend to farmers and micro firms that the market ignores. But forced lending by banks with no rural network can lead to poor-quality loans.
• PSLCs keep the social target but let the cheapest lender do the lending. RRBs and SFBs specialise, and other banks pay them a fee.

• The system meets its targets at a lower total cost. This supports inclusive growth (GS-III).

• The risk of "buying" compliance:

• A bank can meet its targets without ever lending to a single farmer.
• This weakens the direct link between large banks and rural borrowers. It can also leave rural credit concentrated in a few smaller lenders.

• The RBI's district weights for FY 2024-25 to 2026-27 push the other way. New PSL loans in districts with per capita PSL below ₹9,000 get a 125% weight, and those in districts above ₹42,000 get a 90% weight [1]. This rewards banks that lend directly in under-served regions.

• Reward for rural reach and financial inclusion:

• Premium income makes lending beyond the target profitable for RRBs and SFBs.
• This supports small and marginal farmers and micro enterprises. It links to the financial inclusion agenda (PMJDY) and to balanced regional development.

Related concepts

• Co-lending

Read more

• Directed lending: priority sector targets, PSLCs and co-lending