Context:
The Reserve Bank of India (RBI) has announced revised Priority Sector Lending (PSL) norms, effective April 1, 2025, aimed at increasing credit flow to sectors such as housing, clean energy, and weaker sections. These regulations are expected to benefit banks with lower organic PSL generation, notably HDFC Bank, RBL Bank, Federal Bank, and IndusInd Bank.
Key Changes in PSL Norms
- Increased loan limits for housing and renewable energy projects.
- Expanded purposes for classifying loans under renewable energy.
- Inclusion of transgender individuals under the “weaker sections” category.
- Removal of caps on loans by urban cooperative banks (UCBs) to individual women beneficiaries.
Impact on Banks with Lower PSL Generation
According to IIFL Capital:
- These revisions help banks reduce their reliance on:
- Priority Sector Lending Certificate (PSLC) purchases.
- Investments in the Rural Infrastructure Development Fund (RIDF), which typically yield lower returns.
- In FY24, organic PSL shortfalls were observed in:
- RBL Bank — 26% of ANBC (vs. required 40%)
- IndusInd Bank — 32%
- Federal Bank — 32%
RIDF Investments (as % of opening ANBC):
- RBL Bank — 11.3%
- Federal Bank — 6.2%
- SBI — 9.9%
Net PSLC Purchases (as % of domestic advances):
- RBL Bank — 6.4%
- IndusInd Bank — 0.9%
- SBI — 5.7%
- ICICI Bank — 1.9%
RBI’s Broader Regulatory Approach
Under Governor Sanjay Malhotra, the RBI has also:
- Deferred implementation of new liquidity coverage ratio norms by at least a year.
- Announced no set timeframe for rolling out the expected credit loss-based framework.
- Extended timelines for adopting project finance norms by at least a year.
The revised PSL norms will increase credit access for housing, renewable energy, and weaker sections, promoting financial inclusion. Banks with historical PSL shortfalls will benefit from the revised guidelines, reducing the cost of compliance. The RBI continues to balance financial discipline with regulatory relaxation, providing banks space to focus on core lending growth.
