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      Question

      How do Priority Sector Lending Certificates (PSLCs) help

      banks comply with RBI’s priority sector norms while balancing credit risk?
      A They facilitate the direct purchase of loans, shifting the associated risks to the buyer bank. Correct Answer Incorrect Answer
      B PSLCs serve as tradable instruments where the ownership of the underlying loan is transferred. Correct Answer Incorrect Answer
      C They act as compliance tools, enabling banks with surplus PSL loans to monetize excess lending while allowing deficit banks to meet PSL targets. Correct Answer Incorrect Answer
      D These instruments reduce credit risks by offering guarantees for priority sector loans. Correct Answer Incorrect Answer
      E PSLCs provide banks with interest rate subsidies for loans issued in priority sectors. Correct Answer Incorrect Answer

      Solution

      • 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.

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