RBI Updates Priority Sector Lending (PSL) Rules

In January 2026, the Reserve Bank of India (RBI) revised the Priority Sector Lending (PSL) framework to improve regulatory compliance, transparency, and risk alignment, especially in on-lending arrangements and reporting practices.

What is Priority Sector Lending (PSL)?

PSL is a mandatory credit allocation framework under which banks must lend a fixed share of their Adjusted Net Bank Credit (ANBC) to priority sectors such as:

• Agriculture
• MSMEs
• Education
• Housing
• Export credit
• Weaker sections

Its objective is inclusive growth and financial deepening.

Key Changes Introduced by RBI

1. Stronger Compliance & Audit Oversight

• Banks must now obtain external auditor certification for:
  • PSL claims through on-lending to NBFCs, MFIs, HFCs, and cooperatives.
• Objective:
  • Prevent double counting
  • Ensure loans genuinely reach priority sectors

2. Alignment with Prudential Risk Norms

• PSL rules aligned with:
  • Capital adequacy norms
  • Credit concentration norms
  • Credit Risk Transfer (CRT) guidelines
• Ensures PSL growth does not weaken banking stability.

3. Clarification of ANBC Calculation

• RBI refined treatment of:
  • Long-term bonds
  • FCNR(B) / NRE-linked advances
• Reduces ambiguity in determining PSL targets.

4. Standardised Treatment of Off-Balance Sheet Exposures

• Uniform norms across:
  • Commercial banks
  • Small Finance Banks (SFBs)
  • Cooperative banks
• Improves consistency and comparability in PSL reporting.

5. Inclusion of NCDC Loans

• Bank loans to National Cooperative Development Corporation (NCDC) for on-lending to cooperatives now qualify as PSL,
  • Subject to caps and audit certification.

6. Rationalisation for Small Finance Banks

• PSL target for Small Finance Banks revised downward (around 60% of ANBC).
• Balances:
  • Financial inclusion mandate
  • Risk management and sustainability.

7. Enhanced Disclosure & Reporting

• Stricter timelines and formats for:
  • Quarterly and annual PSL disclosures
• Continued protection for small borrowers:
  • No service charges on small PSL loans (e.g. SHGs/JLGs).