Question

How do Priority Sector Lending Certificates (PSLCs) help banks comply with RBI’s priority sector norms while balancing credit risk?

Q: Answer-How do Priority Sector Lending Certificates (PSLCs) help banks comply with RBI&rsquo;s priority sect...

PSLCs are tradable instruments introduced by RBI in 2016 to deepen the priority sector lending market. A bank that has surplus PSL loans can issue PSLCs and monetize its excess lending. A bank that is short of PSL targets can purchase PSLCs to meet regulatory requirements. Importantly, ownership of the underlying loans does not change, and credit risk remains with the originator bank. Thus, PSLCs serve purely as a compliance and market-driven balancing tool, ensuring efficient achievement of PSL norms without actual transfer of loan assets.

A They facilitate the direct purchase of loans, shifting the associated risks to the buyer bank.

B PSLCs serve as tradable instruments where the ownership of the underlying loan is transferred.

C They act as compliance tools, enabling banks with surplus PSL loans to monetize excess lending while allowing deficit banks to meet PSL targets.

D These instruments reduce credit risks by offering guarantees for priority sector loans.

E PSLCs provide banks with interest rate subsidies for loans issued in priority sectors.

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How do Priority Sector Lending Certificates (PSLCs) help banks comply with RBI’s priority sector norms while balancing credit risk?

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