RBI Eases PSL Norms for SFBs, Unlocks ₹40,000 Cr for Diversification

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.