RBI Lowers PSL Target for Small Finance Banks to 60%

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  • Last Updated on 23 June, 2025

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RBI PSL Target

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. 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. 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

Component Old Norm Revised Norm
Overall PSL Target 75% of ANBC or CEOBSE 60% of ANBC or CEOBSE
Allocation to Core Sectors 40% 40% (Unchanged)
Flexible Component Allocation 35% 20%
  • 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.

Click Here To Read The Full Circular

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied