Context:
The Reserve Bank of India (RBI) has revised its Priority Sector Lending (PSL) guidelines for Small Finance Banks (SFBs), reducing their mandatory lending target from 75% to 60% of Adjusted Net Bank Credit (ANBC) or credit equivalent of off-balance sheet exposures, whichever is higher. The new norms will be effective from FY26 (2025–26).
What is Priority Sector Lending (PSL)?
Priority Sector Lending refers to the mandatory lending by banks to sectors deemed important for the overall development of the economy, particularly in terms of inclusive growth. These sectors include:
- Agriculture
- Micro, Small and Medium Enterprises (MSMEs)
- Education
- Housing
- Renewable energy
- Export credit
- Social infrastructure
- Weaker sections
The RBI mandates specific PSL targets for different types of banks to ensure adequate credit flow to these sectors, which might otherwise be underserved by commercial lending.
Key Highlights of the New PSL Norm for SFBs:
- New Target:
- 60% of ANBC or credit equivalent of off-balance sheet exposure, whichever is higher
- Earlier Target:
- 75% under existing norms
- Effective Date:
- Applicable from Financial Year 2025–26
Implications of the Revision
- Brings regulatory relief and greater flexibility to SFBs
- Allows for more diversified loan portfolios and better credit risk management
- Expected to improve capital efficiency while still supporting critical development sectors
Background
- When launched, SFBs were required to meet a higher PSL obligation (75%) compared to 40% for scheduled commercial banks, due to their focus on financial inclusion.
- This revision reflects RBI’s intent to balance inclusion mandates with operational sustainability of these newer banking entities.
