RBI Lowers PSL Target for Small Finance Banks to 60%

Circular No. RBI/2025-26/61 DOR.LIC.REC.36/16.13.218/2025-26; Dated: 20.06.2025

The Reserve Bank of India (RBI) has issued a notification revising the Priority Sector Lending (PSL) targets applicable to Small Finance Banks (SFBs). These changes aim to streamline lending practices, ensure credit discipline, and align PSL mandates with evolving economic priorities.

1. Key Change – Reduction in Overall PSL Target

Under the revised norms:

• The overall PSL target for SFBs has been reduced from 75% to 60% of:

1. 1. Adjusted Net Bank Credit (ANBC), or
   2. Credit equivalent of off-balance sheet exposures, whichever is higher.

This change brings the PSL target for SFBs closer to that of scheduled commercial banks, with a view to offering greater operational flexibility.

2. Core and Flexible Sector Allocation – Rebalanced

As per the existing guidelines:

• 40% of ANBC must be mandatorily lent to core priority sectors, including:

1. 1. Agriculture
   2. Micro and small enterprises (MSEs)
   3. Education
   4. Housing
   5. Others as notified under PSL

Earlier, SFBs were permitted to allocate the remaining 35% of their ANBC to one or more sub-sectors within the broader PSL categories.

This flexible allocation component has now been reduced to 20%.

3. Summary of Revised PSL Structure for SFBs

• Strategic Rebalancing – SFBs will need to realign their credit portfolios, focusing more on core PSL sectors rather than sectoral flexibility.
• Reduced Compliance Pressure – The lowered overall target provides relief to newer and smaller SFBs struggling to meet the previous 75% threshold.
• Enhanced Focus on Core Inclusion Objectives – The unchanged 40% allocation to core sectors ensures that financial inclusion priorities remain intact.

5. Conclusion

RBI’s revision to PSL norms for Small Finance Banks seeks to balance flexibility with accountability, ensuring that credit continues to flow into underserved sectors while providing operational breathing room to SFBs.

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