RBI Tightens Priority Sector Lending (PSL) Norms

The Reserve Bank of India has strengthened the compliance framework for Priority Sector Lending (PSL) to prevent misuse and ensure genuine credit flow to priority sectors like agriculture, MSMEs, and weaker sections.

What is Priority Sector Lending (PSL)?

• Priority Sector Lending (PSL) is an RBI-mandated credit policy that directs banks to lend a specified portion of credit to priority sectors to promote inclusive and balanced economic growth.
• Purpose of PSL: 
  • Promote financial inclusion
  • Support agriculture, MSMEs, education, housing, exports
  • Ensure credit flow to weaker sections of society
  • Reduce regional and social inequalities
• Major Sectors under PSL:
  • Agriculture
  • Micro, Small and Medium Enterprises (MSMEs)
  • Export Credit
  • Education Loans
  • Housing Loans
  • Social Infrastructure & Renewable Energy
  • Weaker Sections (SC/STs, SHGs, small & marginal farmers, etc.)
• Key Feature: Loans must be used strictly for approved purposes, and banks must monitor end-use to qualify as PSL.

Causes of Revised PSL Norms

• Over- classification: BI recently found over-classification of agricultural loans for non-farm purposes.
• Double Counting: Concerns arose about double counting, the same loan being claimed as PSL by more than one bank.

Revised Priority Sector Lending (PSL) Norms

• Mandatory Auditor Certification: All intermediary lenders must provide an external auditor’s certificate.
  • The certificate must confirm that the on-lending benefits have not been claimed by any other bank.
• Banks’ Responsibility Strengthened: All Banks must ensure PSL loans are used only for approved purposes.
• PSL Limits for Intermediary On-Lending: Loans to NBFCs for on-lending to agriculture and MSMEs:
  • Eligible as PSL up to 5% of a bank’s total PSL of the previous financial year.
  • Loans to NBFC-MFIs for on-lending to individuals, SHGs and JLGs (farming, small businesses) eligible as PSL up to 10% of a bank’s total PSL of the previous financial year.
• New Inclusion under PSL: Bank credit to National Cooperative Development Corporation (NCDC) for on-lending to cooperative societies (for specified purposes) is now eligible for PSL classification.
• Monitoring Mechanism: PSL compliance will be monitored quarterly.

Overall PSL Targets

• All the PSL targets are calculated on the basis of Adjusted Net Bank Credit (ANBC).
• Domestic commercial banks & foreign banks with 20+ branches: 40% of ANBC
• Regional Rural Banks (RRBs): 75% of ANBC
• Small Finance Banks (SFBs): Reduced to 60% (from earlier 75%) of ANBC
• Urban Co-operative Banks (UCBs): 60% of ANBC
• Foreign banks with <20 branches: Varies (often aligned with domestic, with sub-target focus)

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Adjusted Net Bank Credit (ANBC)

• ANBC is a lending benchmark defined by the Reserve Bank of India to calculate banks’ Priority Sector Lending (PSL) targets.
• ANBC represents a bank’s total effective credit base (loans and certain other exposures), adjusted according to RBI rules.
• ANBC = Net Bank Credit + eligible investments (as specified by RBI) − certain deductions.

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