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)
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Feature
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Details
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Regulation
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By the RBI under the Banking Ombudsman Scheme, 2006
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Legal Framework
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Companies Act, 2013; Banking Regulation Act, 1949; RBI Act, 1934
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Objective
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Serve the unbanked and underserved sectors – small businesses, farmers, etc.
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Functions
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Offer savings, current accounts, loans, FDs, RDs, etc.
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Eligibility
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Resident individuals with 10+ years in finance, NBFCs, MFIs, etc.
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Capital Requirements
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Min. paid-up equity capital: ?100 crore. Promoter stake: 40% (to be reduced to 26% in 12 years).
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FDI Policy
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As per FDI norms applicable to private sector banks
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Key Changes in PSL Guidelines for SFBs
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Provision
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Earlier
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Now (Effective FY 2025-26)
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Total PSL Target
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75% of ANBC or CEOBE
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60% of ANBC or CEOBE
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Fixed Sub-sector Allocation
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40%
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Remains 40%
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Flexible Component (bank’s choice)
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35%
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Reduced to 20%
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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)