SBI Research Calls for Comprehensive Overhaul of Priority Sector Lending Norms
Priority Sector Lending (PSL) guidelines require a comprehensive review to align with India's evolving financing needs and the Viksit Bharat 2047 vision, according to a recent SBI Research report. The report emphasizes greater focus on infrastructure, climate finance, renewable energy, and higher lending limits across key sectors.
The report states, "Possibly, an opportune time has now come to assess future needs of financial inclusion and priority sector lending and make policy changes needed to ensure access to finance to weaker sections in line with Viksit Bharat objective." It adds that the existing PSL framework, introduced in 1972 to improve credit flow to underserved sectors, has served its purpose but now requires reforms to address emerging priorities such as ESG financing, sustainable development, infrastructure financing, and the electric vehicle ecosystem.
Proposed Changes to Lending Limits
SBI Research proposes increasing lending limits under several existing PSL categories. Key recommendations include raising the renewable energy loan limit from Rs 35 crore to Rs 100 crore, increasing the education loan ceiling eligible for PSL from Rs 25 lakh to Rs 50 lakh, revising housing loan limits, expanding social infrastructure loan limits, and enhancing bank lending limits to NBFCs for on-lending.
The report also recommends widening the scope of PSL by including infrastructure lending, creating a separate category for climate sustainability finance, allowing investments in green and ESG bonds to qualify under PSL, and classifying loans under government-sponsored schemes as lending to micro enterprises and weaker sections. According to SBI Research, these measures would better reflect the country's changing development priorities while improving financial inclusion.
Infrastructure Financing and RIDF Reforms
Looking ahead, the report says infrastructure financing should receive greater policy support as India requires significant long-term investment to achieve its 2047 development goals. It suggests either granting priority sector status to all infrastructure loans or excluding such lending from ANBC calculations for PSL compliance, arguing that existing rules do not adequately recognize banks' infrastructure financing efforts.
SBI Research also calls for reforms to the Rural Infrastructure Development Fund (RIDF), saying changes in capital treatment and interest provisions could improve incentives for banks. It notes that banks currently find it more beneficial to purchase Priority Sector Lending Certificates (PSLCs) than invest in RIDF, highlighting the need to rebalance the framework.
Impact on Financial Inclusion and Growth
The report adds that revising PSL norms in line with emerging sectors and expanding eligible categories could strengthen credit delivery to areas critical for India's next phase of economic growth while supporting the broader Viksit Bharat agenda. While banks are comfortably meeting the overall PSL target of 40% of Adjusted Net Bank Credit (ANBC), the framework should evolve to support India's long-term growth ambitions.
