Banking Notes / Banking Awareness / Chapter 5
Chapter 5 of 17

Loans, Advances & Priority Sector Lending (PSL)

Types of credit facilities and the PSL mandate that directs a fixed share of bank lending toward agriculture, MSMEs, and underserved sectors.

📖 ~9 min read 🏛️ Banking Awareness

Introduction

Banks extend credit in various forms depending on purpose and repayment structure. Priority Sector Lending (PSL) is a regulatory mandate requiring banks to direct a minimum share of their lending toward sectors considered critical for inclusive economic growth.

Types of Loans/Advances

TypeFeature
Term LoanFixed amount disbursed for a specific purpose, repaid over a set tenure in instalments
Cash CreditRevolving credit limit against inventory/receivables, mainly for working capital
Overdraft (OD)Facility to withdraw more than the account balance, up to a sanctioned limit
Demand LoanLoan repayable on demand by the bank, with no fixed repayment schedule
Bill DiscountingBank advances funds against a bill of exchange before its maturity

Priority Sector Lending (PSL) Targets

CategoryTarget (% of Adjusted Net Bank Credit)
Overall PSL target (domestic banks)40%
Agriculture18%
Micro Enterprises7.5%
Advances to Weaker Sections12%

PSL Categories Covered

  • Agriculture (crop loans, allied activities)
  • Micro, Small and Medium Enterprises (MSMEs)
  • Export Credit
  • Education loans (up to a specified limit)
  • Housing loans (up to specified limits, varying by location)
  • Social infrastructure and renewable energy
  • Loans to weaker sections (SC/ST, minorities, small/marginal farmers)
Q. What is the overall Priority Sector Lending target for domestic scheduled commercial banks, as a percentage of Adjusted Net Bank Credit (ANBC)?
The overall PSL target for domestic banks is 40% of ANBC (or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher).
⚠️ Key Insight: PSL targets are calculated against Adjusted Net Bank Credit (ANBC), not total loans outstanding — don't confuse this denominator with a bank's overall loan book.
✅ Practice Focus: Exact PSL sub-target percentages (agriculture, micro enterprises, weaker sections) · Loan type distinctions (term loan vs cash credit vs overdraft) · Sectors covered under PSL.

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