RBI Revises Priority Sector Lending Norms for Small Finance Banks: PSL Target Reduced to 60% from FY 2025-26 [Read Notification]

The Reserve Bank of India (RBI) has announced a revision to the Priority Sector Lending (PSL) requirements for Small Finance Banks (SFBs). Effective from the financial year 2025–26, SFBs will now be required to allocate only 60% of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) whichever is higher toward PSL, a sharp reduction from the current target of 75%.

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Under existing norms, SFBs were mandated to allocate 75% of their ANBC to sectors designated under PSL by the RBI. These sectors include agriculture, micro, small and medium enterprises (MSMEs), education, housing, export credit, and advances to weaker sections. Out of this, 40% of ANBC had to be compulsorily distributed across sub-sectors specified in the PSL framework, while the remaining 35% could be directed by the banks toward any PSL sub-sector where they had a business or regional advantage.

This higher threshold for PSL was unique to SFBs, given their original mandate to improve credit access for underserved and unbanked populations. However, the steep 75% requirement often posed operational and profitability challenges, especially as SFBs scaled up operations and competed more broadly with traditional banks.

According to the RBI notification, the revised framework will lower the flexible component of the PSL allocation from 35% to 20%. While the 40% mandatory allocation to specified PSL sub-sectors remains unchanged, the overall PSL requirement now totals 60% providing SFBs with additional room to diversify their portfolios outside the PSL domain.

The revised directive states:

"Financial year 2025–26 onwards, the additional component (35 per cent) of PSL shall be reduced to 20 per cent, thereby making the overall PSL target as 60 per cent of ANBC or CEOBE, whichever is higher."

This policy shift has been made under Section 22(1) of the Banking Regulation Act, 1949, underscoring its statutory significance.

The easing of PSL norms is widely expected to improve operational flexibility and profitability for SFBs. With more capital available for non-PSL lending, SFBs could expand into new retail or corporate credit products, diversify risk, and better manage asset quality.

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