RBI Governor Asserts Priority Sector Loan Issues Are Bank-Specific, Not Systemic
Mumbai: The Reserve Bank of India (RBI) has provided a firm assurance that the recent concerns regarding the classification of priority sector loans (PSL) at several major private sector banks are isolated, bank-specific matters and do not indicate any broader, system-wide vulnerabilities within the Indian banking sector. The clarification came directly from RBI Governor Sanjay Malhotra during the post-monetary policy conference held on Friday.
"As far as I am concerned, it is not at a system level. These are issues which keep getting flagged in bank-to-bank individual cases at a system level. There is no cause for concern," Governor Malhotra stated emphatically, seeking to allay any fears about the stability of priority sector lending norms.
Specific Bank Cases Highlight Regulatory Scrutiny
The matter gained prominence following disclosures from India's leading private banks. In its third-quarter earnings conference on January 17, 2026, ICICI Bank revealed that the RBI's annual supervisory review for the fiscal year 2025 had directed the bank to make additional provisions amounting to ₹1,283 crore specifically related to its agriculture priority sector loan portfolio.
ICICI Bank's Executive Director, Sandeep Batra, elaborated that the impacted loan book is estimated to be between ₹20,000 crore and ₹25,000 crore. This represents approximately 24% to 30% of the bank's total rural loan portfolio as of December 31. Batra explained that the bank has been managing this portfolio since 2012, and the RBI's assessment concluded that the terms of certain facilities did not fully comply with the regulatory requirements for classification as priority sector loans.
Similarly, HDFC Bank reported making an additional provision of ₹500 crore following its annual inspection by the central bank, underscoring the heightened regulatory focus on compliance.
Axis Bank's Early Flag and Corrective Actions
The issue initially surfaced when Axis Bank, during its second-quarter earnings announcement, highlighted regulatory concerns pertaining to two specific agriculture loan products it had been offering since 2015 and 2021. The bank's Chief Financial Officer, Puneet Sharma, stated on October 15, 2025, that Axis Bank had since discontinued both product variants.
As a corrective measure, the bank made additional provisions totaling ₹1,231 crore and formally declassified these loans from its priority sector lending portfolio. This proactive step was taken in response to the RBI's identification of deviations in how these loans were categorized.
RBI Deputy Governor Reinforces the Point
Echoing the Governor's sentiment, RBI Deputy Governor Swaminathan J. clarified the regulator's stance on Friday. He confirmed that the RBI had identified certain deviations in the PSL classification practices of specific banks, but stressed these were not widespread.
"These are some outlier classifications that we call out, and the banks accordingly do a reclassification. So you can be assured that there is no system-level issue," Deputy Governor Swaminathan affirmed, providing further reassurance about the overall health of the priority sector lending framework.
Under the RBI's established priority sector lending norms, banks are mandated to allocate 40% of their total adjusted net bank credit to designated sectors. These critical sectors include agriculture, micro and small enterprises, education, housing for the economically weaker sections, and renewable energy, among others.
Simultaneous Review and Revamp of Kisan Credit Card Scheme
In a separate but significant development, the RBI announced a comprehensive review of the Kisan Credit Card (KCC) scheme. This initiative aims to expand coverage, streamline operational processes, and address emerging requirements in agricultural financing.
The central bank will issue a revised set of guidelines that introduce several key enhancements. These include standardizing the definition of the crop season across regions, extending the overall tenure of KCC loans to six years, and aligning the drawing limit with the officially determined Scale of Finance (SoF) for each crop season. The revised framework will also explicitly allow for the inclusion of expenses related to technological interventions in farming.
Deputy Governor Swaminathan clarified that this review of the KCC scheme is part of the RBI's routine, periodic assessment of all its guidelines. "We are also modifying certain contours as regards the crop season, the time allowed per season and also the overall validity period of the KCC," he said. He explicitly stated that this review is unrelated to the recent incidents concerning the classification variance of agriculture loans at private banks.
The Kisan Credit Card scheme is a vital tool for providing timely and subsidized credit to farmers for agricultural, animal husbandry, and fishery activities. These loans are typically offered at a concessional interest rate of 4% per annum for prompt repayers. The scheme provides credit limits of up to ₹3 lakh, or higher based on landholding, to cover crop cultivation, post-harvest expenses, and allied activities, traditionally with a five-year validity period.
The RBI's dual announcements—reassuring the market on PSL compliance while proactively modernizing a key farm credit scheme—demonstrate its balanced approach to maintaining regulatory rigor and supporting inclusive economic growth.
