Digital Payments & Priority Sector Lending

Digital payments and Priority Sector Lending (PSL) are two pillars of India's financial inclusion agenda. PSL ensures that underserved segments of the economy receive adequate bank credit, while digital payment infrastructure has revolutionised the way financial transactions are conducted. For JAIIB candidates, mastery of PSL norms, targets, and the evolving digital payments landscape is critical for both the exam and professional practice.

• December 14, 1967: Morarji Desai, then Deputy Prime Minister and Finance Minister, stated in the Lok Sabha that persistent complaints existed that priority sectors such as agriculture, SSI, and exports had not received their fair share of bank credit. This was the first time the phrase "priority sector" was used
• Banking Laws (Amendment) Bill 1967: Introduced the concept of social control over banks, directing them to align activities with national objectives
• July 1968: At a National Credit Council meeting, it was stressed that commercial banks should increase their involvement in financing priority sectors

PSL comprises those sectors that have a substantial influence on a vast portion of the population, the weaker sections, and sectors that are employment-intensive.

The following are the categories identified in India:

Priority sector lending targets and sub-targets are computed based on Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance-Sheet Exposures (CEOBE), whichever is higher, as on the corresponding date of the preceding year.

Banks must lend at least 40% of their total credit to priority sectors, of which 12% must be provided for the weaker sections of society (by 2023-24).

RBI revised PSL guidelines on September 4, 2020, to align with emerging national priorities and inclusive development. New inclusions:

• Bank finance to start-ups (up to Rs. 50 crore)
• Loans to farmers for installation of solar power plants for solarisation of grid-connected agriculture pumps
• Loans for establishment of Compressed Biogas (CBG) plants

As per Government of India Gazette Notification S.O. 2119(E) dated June 26, 2020, the definition of Micro, Small, and Medium Enterprises was revised based on investment in plant and machinery/equipment AND annual turnover.

• RBI included the small renewable energy sector under PSL in 2015
• As at end-March 2020, aggregate outstanding bank credit to non-conventional energy = Rs. 36,543 crore, constituting 7.9% of outstanding bank credit to power generation (up from 5.4% in March 2015)
• Green bonds are issued to finance environmentally sustainable projects, aligned with India's commitments under the 2015 Paris Agreement to reduce greenhouse gas emission intensity by 33-35% below 2005 levels and achieve 40% of installed electric power capacity from non-fossil sources by 2030

SHGs are a critical channel for financial inclusion and priority sector lending:

Customer Due Diligence (CDD):

• CDD of all SHG members is NOT required when opening a savings bank account for the SHG
• CDD of all members is necessary at the time of credit linking (as per RBI MD: KYC 2016)

Linkage for Borrowing (NABARD Guidelines):

• SHGs may be sanctioned savings-linked loans (ratio of 1:1 to 1:4)
• For matured SHGs, loans may go beyond 4x savings at the bank's discretion
• Loan is in the name of the SHG, which is responsible for repayment
• Bank does not decide the purpose — can be for emergencies, illness, marriage, or income-generating assets
• No loan-related service charges on priority sector loans up to Rs. 25,000 (per member for SHGs/JLGs, not per group)
• No collateral should be taken from SHGs (RBI/NABARD guidelines)
• Lending to SHGs is part of priority sector lending and included in lending to weaker sections
• SHG financing by banks is 100% refinanced by NABARD

India has witnessed a transformation in payment systems driven by:

• Unified Payments Interface (UPI) — real-time mobile payment system
• National Electronic Funds Transfer (NEFT) — 24x7 electronic transfer
• Real Time Gross Settlement (RTGS) — for high-value transactions
• Immediate Payment Service (IMPS) — instant interbank transfers
• Aadhaar Enabled Payment System (AePS) — biometric authentication for banking

The digital payments ecosystem in India supports financial inclusion goals by:

• Reducing cash dependency
• Enabling seamless transactions in rural and semi-urban areas
• Supporting the Business Correspondent (BC) model for last-mile delivery
• Facilitating government-to-person (G2P) payments through Direct Benefit Transfer (DBT)

• CSR aims to voluntarily incorporate economic, social, and environmental obligations into business operations
• Section 135 of the Companies Act 2013 provides legal support for CSR in India
• Schedule VII provides the overall direction for CSR efforts
• SDGs (Sustainable Development Goals) are measurable targets that result from CSR programmes
• Businesses play a key role in facilitating SDG implementation through CSR

1. PSL concept originated in December 1967 (Morarji Desai's Lok Sabha statement)
2. PSL target for domestic commercial banks: 40% of ANBC; for Small Finance Banks: 75%
3. 12% must go to weaker sections (by 2023-24)
4. September 2020: RBI revised PSL guidelines — added start-ups (up to Rs. 50 crore), solar solarisation, and CBG plants
5. PSL targets computed on ANBC or CEOBE, whichever is higher
6. SHG-Bank linkage: No collateral for SHGs; 100% refinanced by NABARD; Model II is most popular
7. CDD for SHG account opening: not required; CDD at credit linking: required
8. No service charges on PSL loans up to Rs. 25,000 per member
9. Green bonds: Aligned with Paris Agreement commitments (33-35% emission reduction by 2030)
10. Renewable energy credit under PSL: Rs. 36,543 crore outstanding (end-March 2020) = 7.9% of power credit
11. Section 135 of Companies Act 2013: Legal basis for CSR in India
12. MSME definition revised via Gazette Notification dated June 26, 2020