Context: Recently, RBI has revised its priority sector lending(PSL)  guidelines to encourage banks to provide small loans in economically disadvantaged districts with low average loan sizes. 

• RBI has amended the Master Directions on PSL, which applies to every Commercial Bank (including Regional Rural Bank (RRB), Small Finance Bank (SFB), Local Area Bank), and Primary (Urban) Cooperative Bank (UCB).

New PSL Guidelines

• To address regional disparities, districts will be ranked based on per capita credit flow to the priority sector.:

• It aims to build an incentive framework with higher weight (125%) for districts with comparatively lower credit flow and a disincentive framework with lower weight (90%) for districts with comparatively higher credit flow. 

• Effective Period: From FY 2024-25 to FY 2026-27.

• All bank loans to MSMEs shall qualify for classification under PSL.

• Mandated target differs for different banks and is 40% for Scheduled commercial banks and foreign banks (with 20 or more branches) while it is 75% for RRBs and SFBs.

• UCBs have to allocate 65% to PSL in FY 2024-25 but increasing it to 75% in FY 2025-26. 

• The central bank has assigned a higher weight of 125% to the incremental priority sector credit in the districts with per capita priority sector credit less than Rs 9000, with effect from FY25.

• This effectively means that if a bank gives Rs 100 loan in low credit flow district, it will be considered as Rs 125 priority sector loan.

• Earlier from FY22 onwards till date, RBI followed a rule of higher weight of 125% in districts where per capita priority sector credit flow was Rs 6000.

• There is also a dis-incentive framework for districts with comparatively higher flow of priority sector credit in which a lower 90% weight is assigned for districts where the per capita priority sector credit flow is greater than Rs 42,000.

• This threshold was revised from Rs 25000 earlier.

• The weight is maintained at 100% for all other districts not mentioned by the central bank.

About Priority Sector lending 

• Priority sector lending (PSL) in India refers to the mandatory lending targets set by the Reserve Bank of India (RBI) for banks and financial institutions to ensure that certain sectors of the economy receive adequate credit and financial support. 

• The objective of priority sector lending is to promote inclusive growth, reduce regional imbalances, and support marginalised sections of society.

• Specified sectors  Agriculture, MSMEs, social infrastructure, renewable energy, and others as priority sectors based on their social and economic significance.

• PSL was formalised in 1972 to facilitate flow of credit to such sectors, which though creditworthy, are unable to access credit from formal financial institutions.

• PSL Targets: Banks have to mandatorily allocate a portion of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher, towards PSL.