PSLAI Aims to double credit disbursements in SME/MSME sector in the coming years. Currently Banks are required to maintain at least 40% of their Adjusted Net Bank Credit (ANDC) as priority sector loans. This amounts to an annual disbursement of nearly INR 64 trillion to MSMEs.
FinTech BizNews Service
Mumbai, 20 January 2025: The Priority Sector Lenders Association of India (PSL Association or PSLAI), formed as a Section 8 company, has been conceptualized to make loans under the Priority Sector Lending norms, an important business vertical for Banks and NBFCs. Currently, as per the RBI regulations, Banks are required to maintain at least 40% of their Adjusted Net Bank Credit (ANDC) as priority sector loans. This amounts to an annual disbursement of nearly INR 64 trillion to MSMEs. Since loans under PSL are relatively of a small amount and are also considered riskier, the majority of the target is met by institutions through indirect means, such as securitization deals.
The RBI defines PSL loans under 8 heads, which include agriculture, MSME and affordable housing. So far, credit to the agricultural sector has garnered the largest share of the pie under the PSL disbursements. The MSME sector, contributing nearly 29% of India's GDP and 45.73% of exports, faces a significant credit gap of INR 103 trillion, as of Fiscal 2024. Despite a growing demand for credit of INR 138 trillion, only 25% of the sector's formal financing needs are currently met, leaving the majority of MSMEs reliant on informal credit sources.
With a view to solve the problem of credit for Priority Sectors especially for MSMEs, under the aegis of iSPIRT, a new industry body named PSLAI has been formed. iSPIRT is bringing on board multiple lending institutions like UGRO Capital, IIFL, fintechs like GetVantage/GetGrowth Capital and many others as its founding members. iSPIRT believes that India’s digital growth, supported by the Indian DPI, has opened up newer avenues for the SME/MSME sector, and with the right product developments and policy push, the credit under this sector can double to nearly INR 130 trillion in the next few years and achieve 2x growth in the next 3-5 years. However, this requires deep deliberations across a few pillars:
(i) Recognising a new category of NBFC lenders which focuses on Priority Sector Loans: NBFC-PSL (similar to NBFC-MFI & NBFC-HFC)
(ii) Enhancing the faith in the creditworthiness of Priority Sector Borrowers through dialogue and deep deliberation
(iii) Increasing the adoption of DPIs like OCEN to increase the flow of cashflow-based financing
(iv) Increasing the liability flow of priority sector lending in India through policy advocacy
PSLAI will be headed by Priyashmita Guha as the Chief Executive Officer and run with the help of an accomplished Board of Directors. Before joining PSLAI, Priyashmita was the COO of the Digital Lenders Association of India and was instrumental in driving the network growth of the association.
Sharad Sharma, Co-Founder, iSPIRT said, “The focus of PSLAI will be on initiating conversation on liberalized risk weightage on PSL portfolios, mitigating perceived risks through Digital Public Infrastructure (DPI), and establishing fair practices within the industry. It will advocate for policy reforms which will further strengthen the borrower ecosystem, particularly for MSMEs.”
Shachindra Nath, Founder and Managing Director, UGRO Capital said, “If you go and talk to a bank in India today, they will say MSME financing is not an issue. Every shopkeeper can get an Udyam certificate and become a priority sector borrower. The Bank’s 7.5% PSL requirement for MSME gets completely filled up. With a provision of being tagged or licensed as NBFC-PSL, technically any lending from a Bank to such an entity can come at a lower rate and be part of the Bank’s priority sector lending.”
Team PSLAI believes that promoting and developing credit products that use India’s DPI and support cashflow-based lending products will play an important role in making PSL more mainstream. The Association thus plans to include, promote and popularise digital networks like OCEN (Open Credit Enablement Network) and other DPI technology networks as vital product development tools. PSLAI will actively work with network partners and financial institutions to develop innovative lending products, built on all platforms.
The Association will bring together financial institutions, industry stakeholders, regulatory authorities, and tech companies to tackle the unique challenges and capitalize on the vast opportunities within priority sector lending (PSL).
