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

  • 30 Jun 2025

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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.