Priority sector lending

The Indian requirement that banks direct a specified share of their lending to designated sectors including agriculture, small enterprises and weaker sections.

Banks that fall short buy priority-sector lending certificates or acquire qualifying pools from other lenders, which is one of the main reasons the direct assignment market exists.

For analysis the consequence is a mix effect on both yield and credit cost. The obligation is a real constraint on a bank's asset allocation and it shows up in the segment disclosures.

Targets and definitions are set by regulation and change. Verify the current figures.

A constraint on the asset mix, written into law.

The consequence shows up in two places an analyst can measure. Yield on advances is dragged down where the mandated segments price below the book average, and credit cost is raised where those segments default more, so the risk-adjusted spread on the obligated portion is structurally thinner. Banks that meet the requirement through their own origination, rather than by buying certificates or pools from other lenders, generally do so because they built distribution in those segments and can underwrite them, which is a genuine capability rather than a compliance cost.