Evolution of PSL
Priority Sector Lending (PSL) emerged from credit policy prescriptions in the late 1960s to channel institutional credit to underserved sectors critical for inclusive growth, gaining shape alongside bank nationalization in 1969 and subsequent policy frameworks in the 1970s. The concept was formalized through targeted prescriptions after early studies and working groups, culminating in the 1980s with the 40% overall target for commercial banks and sub-targets for agriculture and weaker sections, which have been recalibrated periodically to reflect developmental priorities.
Categories under PSL
Under RBI’s Master Directions, PSL categories include Agriculture, Micro, Small and Medium Enterprises (MSME), Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, and Others, with detailed eligibility criteria specified for granular activities within each category. The revised framework notified in March 2025 further refines coverage by enhancing several loan limits and broadening eligible purposes under Renewable Energy, aiming to sharpen the development impact and alignment with evolving sectoral needs.
Targets and sub-targets
For scheduled commercial banks, the total PSL target has historically been set at 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, with sub-targets such as agriculture and small and marginal farmers specified and updated over time. Urban Co-operative Banks (UCBs) have revised targets under the 2025 update, with the overall PSL requirement increased to 60% of ANBC or credit equivalent of off-balance sheet exposures, reflecting a calibrated push for inclusion through the cooperative segment.
Common guidelines
Common PSL guidelines prescribe borrower and activity eligibility, caps and limits, on-lending and co-lending treatment, and documentation standards to ensure consistent classification and reporting across banks. Bank credit to NBFCs and HFCs for on-lending can qualify as PSL under specific sub-category conditions and borrower-level caps, subject to portfolio tracking and end-use compliance.
Non-achievement of PSL targets
When banks do not meet mandated PSL targets and sub-targets, shortfalls are required to be contributed to designated funds such as those managed by NABARD, NHB, SIDBI, and MUDRA Ltd., and such shortfall treatment is factored into supervisory and regulatory assessments. For UCBs, RBI clarified in June 2025 that these mandated contributions are exempt from prudential exposure aggregation to the specified counterparties but attract 100% risk weight as “all other assets” for capital adequacy, with immediate effect.
Differential weights and regional focus
To incentivize balanced geographic distribution, RBI assigns higher weights to incremental PSL in identified under-served districts from FY 2024–25, thereby nudging banks to deploy credit in lagging regions beyond simply meeting headline targets. This calibrated approach complements category expansions to ensure both sectoral and regional inclusivity in credit deployment.
Measurement and reporting
PSL achievement is assessed at the end of the financial year against total targets and applicable sub-targets, with detailed reporting formats and supervisory oversight anchored in the Master Directions. FAQs released in May 2025 emphasize that PSL eligibility flows from the Master Directions and clarifications, underscoring the importance of precise classification, documentation, and end-use verification for accurate reporting.
Recent updates (2025)
RBI’s March 2025 review introduced enhanced limits for certain categories (e.g., education and housing), broadened renewable energy purposes, revised UCB targets, and expanded the scope of weaker sections, removing certain caps such as those on loans by UCBs to individual women beneficiaries. These changes, effective April 1, 2025, are aimed at better targeting credit to sectors with high socio-economic multipliers while tightening outcome-focused monitoring through clearer categorizations.
Priority sector credit achievement
Banks typically employ multiple channels—direct origination, co-lending with NBFCs, on-lending, securitisation/assignment, and transfer of loan exposures—to achieve PSL targets efficiently while managing risk-return profiles. Supervisory disclosures and press releases indicate that non-achievement can invite monetary penalties and may influence regulatory approvals, reinforcing the imperative to maintain year-end compliance and robust internal tracking.
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