Priority Sector Lending: Targets, Limits and PSLCs

The correct answer is B, 40 per cent of Adjusted Net Bank Credit. A domestic commercial bank, and a foreign bank with 20 or more branches in India, must lend 40 per cent of its Adjusted Net Bank Credit, or of the Credit Equivalent of Off-Balance Sheet Exposure where that is higher, to the priority sector. The figure has stood at 40 per cent since 1985 and is repeated in the Reserve Bank of India (Priority Sector Lending - Targets and Classification) Directions, 2025. Option A is wrong because 18 per cent is the sub-target for agriculture alone, not the whole priority sector. Option C is wrong because 60 per cent is the target set for small finance banks and for primary urban co-operative banks, which were created to serve small borrowers. Option D is wrong because 75 per cent applies to regional rural banks, whose whole business is rural lending.

The correct answer is C, 18 per cent. Of the 40 per cent that a domestic commercial bank must lend to the priority sector, 18 per cent of Adjusted Net Bank Credit has to go to agriculture, which covers farm credit, agriculture infrastructure and ancillary activities. Within that 18 per cent there is a further sub-target of 10 per cent for small and marginal farmers and of 14 per cent for non-corporate farmers. Option A is wrong because 10 per cent is that small and marginal farmer slice, which sits inside the agriculture figure. Option B is wrong because 12 per cent is the target for weaker sections, an overlapping head that counts borrowers rather than activities. Option D is wrong because 7.5 per cent is the sub-target for micro enterprises under the micro, small and medium enterprises category.

The correct answer is C, defence production. The Directions list eight categories: agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, renewable energy and others. Defence production is not among them, however large the industry is, because the priority sector exists for borrowers who are starved of institutional credit, and defence firms borrow against government orders. Option A is wrong because export credit is the third listed category, kept there to help exporters who need working capital for short periods. Option B is wrong because social infrastructure is a category in its own right and carries loans for schools, drinking water, sanitation and health care facilities in smaller centres. Option D is wrong because renewable energy was added as a separate category, with a ceiling for a borrower and a smaller one for an individual household.

The correct answer is C, 75 per cent of Adjusted Net Bank Credit. A regional rural bank is set up under the Regional Rural Banks Act, 1976 to serve farmers, farm labourers and rural artisans, so the Reserve Bank asks it for a much higher share than it asks of a commercial bank: 75 per cent to the priority sector, with 18 per cent for agriculture, 10 per cent for small and marginal farmers, 7.5 per cent for micro enterprises and 15 per cent for weaker sections, the highest weaker sections target of any bank. Option A is wrong because 40 per cent applies to domestic commercial banks and to foreign banks with 20 or more branches. Option B is wrong because 60 per cent is the figure for small finance banks and primary urban co-operative banks. Option D is wrong because no bank is asked to put its entire credit in the priority sector.

The correct answer is C, 25 lakh rupees. Under the 2025 Directions a loan to an individual for educational purposes, including a vocational course, is classified as priority sector lending so long as it does not exceed 25 lakh rupees; the ceiling applies to the loan, not to the fee or the course. Option A is wrong because 10 lakh rupees is the ceiling for a loan to an individual household for a renewable energy installation, such as a rooftop solar system. Option B is wrong because 20 lakh rupees was the earlier education ceiling and was raised, so it is the classic trap in this question. Option D is wrong because 50 lakh rupees is the housing loan ceiling for a centre with a population of 50 lakh and above, where the cost of the dwelling unit must also stay within 63 lakh rupees.

The correct answer is A, NABARD. A bank that falls short of its priority sector target is not fined; it is required to place the shortfall in the Rural Infrastructure Development Fund kept with the National Bank for Agriculture and Rural Development, or in the funds notified with SIDBI, the National Housing Bank and MUDRA, and it earns a deliberately low return there, the Bank Rate minus two to four percentage points depending on the size of the shortfall. Option B is wrong because SEBI regulates the securities market and has no role in bank credit. Option C is wrong because the Reserve Bank sets the targets and monitors them but does not itself hold the Rural Infrastructure Development Fund. Option D is wrong because the Ministry of Finance makes policy and owns the public sector banks, while the fund is operated by NABARD.

The correct answer is C, 25 lakh rupees and multiples thereof. Priority Sector Lending Certificates were introduced in 2016 so that a bank which has lent beyond its target can sell the excess achievement to a bank that has fallen short. They are traded on the Reserve Bank e-Kuber platform in a standard lot of 25 lakh rupees and multiples of it, and every certificate expires on 31 March whatever the date of purchase. Options A and B are wrong because one lakh and ten lakh rupees are not the prescribed lot; a lot that small would make the platform unwieldy. Option D is wrong because one crore rupees would shut out smaller banks and co-operative banks that buy in modest amounts. Note also that only the target achievement is transferred; the loan and its credit risk stay with the selling bank.

The correct answer is C, a medium enterprise with a turnover of 200 crore rupees. Weaker sections is an overlapping head that counts the borrower rather than the activity, and the Directions list small and marginal farmers, artisans with a credit limit up to two lakh rupees, beneficiaries of government sponsored schemes, Scheduled Castes and Scheduled Tribes, beneficiaries of the differential rate of interest scheme, self-help groups and joint liability groups, individual women up to two lakh rupees, distressed farmers, persons with disabilities, transgender persons and notified minority communities. A medium enterprise of that size is nowhere in that list, and for domestic banks such lending counts towards the overall achievement only within a 15 per cent cap. Options A, B and D are wrong because self-help groups, persons with disabilities and Scheduled Caste and Scheduled Tribe borrowers are each named in the list.

The correct answer is B, Adjusted Net Bank Credit or the Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher. The base is deliberately a credit figure and not a deposit figure, because the obligation is about where a bank lends. Adjusted Net Bank Credit starts from bank credit in India, with adjustments the Directions specify, and the off-balance sheet figure captures exposures such as guarantees; the higher of the two is taken as on the corresponding date of the preceding year. Option A is wrong because deposits are the source of funds, not the measure of lending, and a bank with few deposits may still lend heavily. Option C is wrong because profit varies with provisioning and would make the target swing year to year. Option D is wrong because capital and reserves are the base for capital adequacy and exposure norms, not for priority sector targets.

The correct answer is C, 1 April 2025. The Directions were issued on 24 March 2025 and came into effect on 1 April 2025, superseding the Directions of 4 September 2020. The revision raised the education ceiling to 25 lakh rupees, raised the housing ceilings on the three population slabs, and set 60 per cent as the target for primary urban co-operative banks. Option A is wrong because April 2015 was an earlier revision, the one that introduced the sub-targets for small and marginal farmers and micro enterprises and allowed off-balance sheet exposure in the base. Option B is wrong because 4 September 2020 is the date of the Directions that these replaced, a favourite distractor. Option D is wrong because the Directions did not wait for a calendar year to begin; like most Reserve Bank lending norms they follow the financial year.

The correct answer is B, 10 lakh rupees. Under the renewable energy category a bank may lend up to 35 crore rupees to a borrower for a solar, biomass, wind, micro-hydel or non-conventional energy project, and for an individual household the ceiling is 10 lakh rupees, which is what a rooftop solar system or a small biogas plant needs. Option A is wrong because five lakh rupees is not a ceiling the Directions use for this purpose. Option C is wrong because 35 lakh rupees is the housing loan ceiling for a centre with a population below ten lakh, where the dwelling must cost no more than 44 lakh rupees. Option D is wrong because 35 crore rupees is the project ceiling for a borrower such as a developer of a renewable energy generator, not the figure for a household.