In June 2025, the Reserve Bank of India(RBI) revised the regulatory lending norms for Small Finance Banks (SFBs), reducing the mandated allocation to priority sectors by 15%. The revised guidelines are set to come into effect from 1 April 2025.
- From the Financial Year 2025-26(FY26), Priority Sector Lending (PSL) loans target for SFBs has been lowered to 60% of their loans from 75% earlier.
- The revised guidelines are intended to provide SFBs with greater operational flexibility and form part of the RBI’s ongoing efforts to simplify regulatory frameworks. These changes have been issued under Section 22(1) of the Banking Regulation Act, 1949.
Note: In March 2025, RBI reduced the PSL target for Urban Cooperative Banks (UCBs) from 75% to 60%.
Key Highlights:
i.The SFB are required to allocate 40% of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) to specific sub-sectors defined under PSL guidelines and the remaining 35% to any PSL sub-sector where they have a competitive advantage.
- From FY26, this additional component (35%) of PSL allocation will be reduced to 20%, thereby making the overall PSL target as 60 % of ANBC or CEOBE, whichever is higher.
ii.SFBs will continue to allocate 40% of their ANBC or CEOBE, whichever is higher, to different sub-sectors under PSL as per the extant PSL prescriptions.
- While the balance 20% can be allocated to any one or more sub-sectors under the PSL where the bank has competitive advantage.
iii.The reduction from 35% to 20% effectively aligns SFB lending closer to core developmental goals, while also offering some strategic discretion to the banks.
- Also, this reduction could provide better balance sheet management opportunities for SFB and help them diversify credit exposure.
Key Terms:
i.Priority Sector Lending (PSL): It is a key policy initiative of the RBI that mandates banks to provide a specified portion of their loans to certain sectors of the economy that may not otherwise receive adequate credit. It ensures that vulnerable and underserved sections of society can access credit at lower interest rates.
- PSL includes loans extended to key sectors such as agriculture, Micro, Small and Medium Enterprises (MSMEs), export credit, education, housing, social infrastructure, renewable energy, weaker sections, and other specified segments.
ii.Adjusted Net Bank Credit (ANBC): It is net banking credit after taking into account bill discounting, non-SLR (Statutory Liquidity Ratio) securities and other exemption via long-term bonds.
iii.Credit Equivalent of Off-Balance Sheet Exposures (CEOBE): It represents the amount of these off-balance sheet items that are converted into a credit exposure equivalent to on-balance sheet items.
About Reserve Bank of India(RBI):
Governor – Sanjay Malhotra
Headquarters – Mumbai (Maharashtra)
Established – 1935
