The Reserve Bank of India (RBI) lowered the priority sector lending (PSL) target for Small Finance Banks (SFBs)from 75% to 60% of Adjusted Net Bank Credit (ANBC)  or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE), whichever is higher.

• Earlier SFBs, mandated to allocate 75% of their ANBC to priority sector lending, faced challenges in sourcing quality borrowers, resulting in lower margins.

Benefits of New PSL Norms

• The new PSL norms are expected to free up around ₹41,000 crore, which equals about 15% of SFBs’ advances as of March 31, 2025, per CareEdge estimates.
• This freed-up capital can be redeployed into higher-yielding or lower-risk segments like:
  • Secured retail loans
  • Micro, Small and Medium Enterprises (MSME)
  • Housing finance

Priority Sector Lending

• Priority Sector Lending requires banks to give a minimum proportion of their loans to sectors of development importance or the sectors that have difficulty getting loans.
• Categories of Priority Sectors
  • Agriculture; 
  • Micro, Small and Medium Enterprises; 
  • Export Credit; 
  • Education; 
  • Housing; 
  • Social Infrastructure; 
  • Renewable Energy; 
  • Food Processing Sector.
• RBI periodically updates the sectors that are eligible to get priority sector lending and the limits of loans. 
• Banks can meet their PSL obligations by extending loans, providing credit facilities, and offering financial products and services to individuals, entities, and enterprises in the priority sectors. 
  • They can also fulfil their targets through investments in eligible instruments, such as bonds issued by entities engaged in priority sector activities. 
• Case of Failure: In case, banks fail to meet their PSL targets, They have to deposit the allocated amount to the Rural Infrastructure Development Fund (RIDF) established with NABARD and to other funds with NABARD, SIDBI, Mudra, National Housing Bank, etc., as decided by the RBI from time to time.

What are Small Finance Banks (SFBs)?

• Small Finance Banks (SFBs) are specialized banks in India that focus on the financial needs of underserved and unserved population segments, such as small business units, micro and small businesses, and unorganized sector entities. 
  • For Example: Capital Small Finance Bank, Ujjivan, Utkarsh etc.

• Announced in the Union budget of 2014-15.
• Objective: To promote financial inclusion by meeting the needs of small businesses, small and marginal farmers, micro and small enterprises, and unorganized sectors.
• Promoters of Small Finance Banks: Individuals, corporations, trusts, or societies can promote small finance banks.
• Legal Structure: They are formed as public limited companies in the private sector, licensed under the Banking Regulation Act of 1949, and supervised by the RBI Act of 1934.
• No Restrictions: Unlike regional rural banks (RRBs) and local area banks, SFBs can operate without restriction in terms of location.
• Capital Requirement: The minimum capital requirement for SFBs is 200 crores.
• Branches: At least 25% of SFB branches should be in unbanked rural areas.
• Loan Portfolio: A minimum of 50% of the loan portfolio should consist of loans and advances of up to 25 lakhs.

Priority Sector Lending Certificates (PSLCs)

• PSLCs are certificates that are issued against priority sector loans for banks.
• They allow banks to meet their targets and sub-targets when it comes to priority sector lending by buying the instruments.
• The banks use PSLCs to guard against shortfalls.
• Four types: PSLC-Agriculture, PSLC-MSME, PSLC-General, and PSLC-Weaker Sections.

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