Context:
In a move aimed at increasing operational flexibility for Small Finance Banks (SFBs), the Reserve Bank of India (RBI) has reduced the priority sector lending (PSL) target from 75% to 60% of adjusted net bank credit (ANBC), freeing up approximately ₹40,000 crore for deployment in diversified, lower-risk lending.
Key Regulatory Changes
- Old PSL Norms:
- SFBs were required to lend 75% of ANBC to PSL sectors.
- 40% was earmarked for specific PSL subsectors.
- Remaining 35% could be directed to any PSL subsector of their choice.
- New PSL Norms (Effective FY26):
- Overall PSL requirement reduced to 60% of ANBC or off-balance-sheet exposures (whichever is higher).
- The flexible 35% component has been reduced to 20%.
Implications for SFBs
- Operational Flexibility:
- SFBs can now de-risk their books and explore non-PSL asset classes such as:
- Loan Against Property (LAP)
- Vehicle and personal loans
- Loans against mutual funds or shares
- Asset Quality Boost:
- With many SFBs holding large microfinance portfolios, diversification may mitigate risks linked to economic volatility.
- Support for Universal Bank Transition:
- This move aligns with RBI’s broader vision of enabling SFBs to transition into universal banks. Three SFBs have already applied for conversion.
