CII seeks priority sector lending for new and emerging sectors

The Confederation of Indian Industry (CII) has sought reforms in India's Priority Sector Lending (PSL) framework to enable the setting up of more Development Finance Institutions (DFI) to provide funds to new and emerging sectors such as digital infrastructure, green initiatives, healthcare, and innovative manufacturing.

"The current Development Finance Institutions like SIDBI and NABFID have their roles cut out as they have earmarked sectors to finance. Therefore, CII has suggested setting up of a high-level committee to look at the revision of Priority Sector Lending norms and also explore the need for any new DFIs to cater to some of the new and emerging sectors," the CII said in a statement on Sunday.

Despite its massive success, the PSL framework requires regular recalibration to remain relevant. This recalibration is essential to ensure that the financial resources are optimally distributed, in harmony with our vision of Viksit Bharat 2047, the statement said.

For instance, while agriculture contributes 14 per cent of the GDP today, its PSL allocation remains at 18 per cent, unchanged from when its GDP share exceeded 30 per cent. Similarly, sectors like infrastructure and innovative manufacturing lack adequate PSL focus despite their potential to drive economic growth, it added.

India’s economy has evolved rapidly over the past few decades, with employment focus shifting to newer sectors because of increased education levels in the society and higher disposable incomes, the statement said.

The PSL is a vital policy tool in India, aimed at ensuring that key sectors crucial to the nation’s development receive adequate financial support. Mandated by the Reserve Bank of India (RBI), PSL obligates banks to allocate a specified proportion of their loans to sectors such as agriculture, education, housing, and small industries. The framework ensures equitable credit distribution, contributing to the socio-economic growth of underserved areas.

CII Director General Chandrajit Banerjee said: "Sectors like agriculture have reduced contribution to GDP from 30 per cent in the 1990s to about 14 per cent now. Hence, it is time that the Priority Sector Lending (PSL) framework be reviewed every 3-4 years to align based on emerging priorities and PSL allocations should be in line with GDP contributions and sectoral growth potential. For instance, we could look at the inclusion of Emerging and High-Impact Sectors, including digital infrastructure, green initiatives, healthcare, and innovative manufacturing."

The industry chamber has, therefore, recommended inclusion in PSL of sectors like green energy projects, electric vehicles, and climate-resilient agriculture along with sectors like digital technologies, artificial intelligence and healthcare innovation.

The CII has further pointed out that besides the above sectors, Infrastructure and manufacturing are poised to make substantial contributions to India’s economic growth.

It said that its recommendation is that of transition to outcome-based metrics, where the focus needs to shift from absolute lending targets to measurable developmental outcomes, ensuring impact-driven credit distribution.