RBI Eases Priority Sector Lending (PSL) Norms for Small Finance Banks (SFBs)

- 30 Jun 2025
In News:
In a major policy shift aimed at enhancing financial flexibility, the Reserve Bank of India (RBI) has reduced the Priority Sector Lending (PSL) target for Small Finance Banks (SFBs) from 75% to 60% of their Adjusted Net Bank Credit (ANBC).
What Has Changed?
Previous Norms:
- SFBs were required to allocate 75% of ANBC towards PSL.
- An additional 35% PSL requirement applied beyond the standard 40% applicable to universal banks.
- These strict targets led to:
- Difficulty in sourcing quality borrowers.
- Compressed profit margins.
- Limited portfolio diversification.
Revised Norms (2024):
- Overall PSL target reduced to 60% of ANBC.
- Additional PSL requirement brought down from 35% to 20%.
- Sub-sector allocation remains: SFBs must continue to dedicate 40% of ANBC to core PSL sectors such as agriculture, MSMEs, and weaker sections.
Objective of the Reform
- Enhance lending flexibility for SFBs.
- Improve asset quality and profitability by allowing portfolio diversification.
- Align SFB regulations more closely with those of other banks, without compromising on financial inclusion goals.
About Small Finance Banks (SFBs)
Origin and Mandate:
- Conceptualised by the NachiketMor Committee (2013).
- Regulated under the Banking Regulation Act, 1949.
- Created to expand financial inclusion by targeting:
- Small and marginal farmers,
- Micro and small enterprises (MSMEs),
- Unbanked and underserved populations.
Key Features:
- Offer basic banking services, including all deposit and small-ticket loan products.
- Operate on a localised model with strong rural and semi-urban outreach.
- Permitted to distribute non-risk sharing financial products like mutual funds and insurance.
Regulatory Requirements:
- At least 25% of branches in rural areas.
- Minimum 50% of loan portfolio must serve the MSME sector.
- Minimum net worth: ?100 crore at inception, to be raised to ?200 crore within 5 years.
- Maintain a Capital Adequacy Ratio (CAR) of 15% on risk-weighted assets.
Significance of the Move
- Offers SFBs greater operational autonomy and room to grow sustainably.
- Aims to balance developmental goals with commercial viability.
- Expected to promote credit flow to priority sectors while ensuring sound financial health of these institutions.