RBI Eases Priority Sector Lending (PSL) Norms for Small Finance Banks

General Studies ( Prelim) Indian Economy

26-Jun-25

Context:

The Reserve Bank of India (RBI) has relaxed Priority Sector Lending (PSL) requirements for Small Finance Banks (SFBs) to provide them with greater operational flexibility and credit deployment efficiency.

What is Priority Sector Lending (PSL)?

Priority Sector Lending is a regulatory requirement by the RBI, mandating that banks allocate a portion of their loans to critical sectors such as:

Agriculture
Micro, Small and Medium Enterprises (MSMEs)
Education
Housing
Export credit
Social infrastructure
Renewable energy
Weaker sections

These sectors are vital for inclusive economic growth but often face credit constraints.

In March 2025, the RBI had already revised PSL norms for banks by increasing limits on loans for housing and education.

At the same time, the PSL target for Urban Cooperative Banks (UCBs) was reduced from 75% to 60%.

About Small Finance Banks (SFBs)

Feature	Details
Regulation	By the RBI under the Banking Ombudsman Scheme, 2006
Legal Framework	Companies Act, 2013; Banking Regulation Act, 1949; RBI Act, 1934
Objective	Serve the unbanked and underserved sectors – small businesses, farmers, etc.
Functions	Offer savings, current accounts, loans, FDs, RDs, etc.
Eligibility	Resident individuals with 10+ years in finance, NBFCs, MFIs, etc.
Capital Requirements	Min. paid-up equity capital: ?100 crore. Promoter stake: 40% (to be reduced to 26% in 12 years).
FDI Policy	As per FDI norms applicable to private sector banks

Key Changes in PSL Guidelines for SFBs

Provision	Earlier	Now (Effective FY 2025-26)
Total PSL Target	75% of ANBC or CEOBE	60% of ANBC or CEOBE
Fixed Sub-sector Allocation	40%	Remains 40%
Flexible Component (bank’s choice)	35%	Reduced to 20%

Note:

SFBs must continue to allocate 40% of ANBC or CEOBE (whichever is higher) to the specified PSL sub-sectors.
The remaining 20% can be allocated to any PSL sub-sector where the bank has a competitive edge.

Implications

Greater flexibility for SFBs to direct credit where they are most efficient.
Potential to improve profitability and risk management for these banks.
Expected to enhance credit flow to priority sectors through more efficient deployment.

Source: Business Standard (BS)

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