RBI’S Master Directions On Priority Sector Lending: Key Highlights

I. INTRODUCTION

Priority Sector Lending (“PSL”) has been a cornerstone of the Reserve Bank of India’s (“RBI”) strategy to direct institutional credit toward sectors deemed vital for socio-economic development. Established in the 1970s and periodically updated, the PSL framework mandates banks to allocate a specific percentage of their Adjusted Net Bank Credit (“ANBC”) to priority sectors, including agriculture, micro, small and medium enterprises (“MSMEs”), housing, education, renewable energy, and social infrastructure.

The dual objectives of PSL are:

1. Addressing the under-financing of critical sectors that may not align with the conventional risk appetite of lenders; and
2. Promoting inclusive, sustainable, and balanced economic growth.

The last comprehensive revision occurred in 2020. Given the evolving economic priorities, particularly in areas like renewable energy, urban infrastructure, and financial inclusion, the RBI has introduced the ‘Master Directions – RBI (Priority Sector Lending – Targets and Classification), Directions 2025’ to update the PSL framework accordingly (“Directions 2025”).

II. APPLICABILITY AND EFFECTIVE DATE

The Directions 2025 were issued by the RBI on March 24, 2025, and have been effective since April 1, 2025. These Directions supersede the previous 2020 directions.

Applicability:

• All Scheduled Commercial Banks (including Regional Rural Banks and Small Finance Banks);
• Local Area Banks (“LABs”); and
• Primary (Urban) Co-operative Banks (“UCBs”) (excluding Salary Earners’ Banks).

Directions 2025 should be interpreted in conjunction with the RBI Act, 1934, the Banking Regulation Act, 1949, and pertinent circulars that continue to govern broader prudential norms.

III. KEY CHANGES

The Directions 2025 introduce several significant revisions to the PSL framework:

1. Enhanced Loan Limits in Select Categories

Housing Loans: The Directions 2025 introduces classifications for loans to individuals based on population thresholds: (i) for centers with a population of 50 lakh or more, loans up to INR 50,00,000 are permitted provided the cost of the dwelling unit does not exceed INR 63,00,000; for centers with 10–50 lakh population, the respective caps are INR 45,00,000 for loans provided that the cost of the dwelling unit does not exceed INR 57,00,000; and for centers below 10 lakh population, the limit is INR 35,00,000 for loans provided that the cost of the dwelling unit does not exceed INR 44,00,000. The criteria mentioned is not mutually exclusive and both criteria must be satisfied. Similar criteria with different thresholds has been introduced for loans for repairs of damaged dwelling units are also included. Under the 2020 directions, the maximum loan to be extended to an individual was INR 35,00,000.

Renewable Energy Projects: Loan limit raised to INR 35,00,00,000 per borrower (from INR 30,00,00,000).

2. Expanded Definition of ‘Weaker Sections’

The Directions 2025 include transgender persons into the list of eligible borrowers under the weaker sections. The loan ceiling for women beneficiaries has been increased to INR 2,00,000 from the earlier INR 1,00,000 ceiling, and such ceiling for UCBs has been removed.

3. Agriculture

This category includes farm credit to individual farmers (e.g., KCC, land purchase, pre/post-harvest activities) with a cap of INR 90,00,000 for loans against hypothecation or pledge of agricultural produce (against electronic warehouse receipts) and INR 60,00,000 for other warehouse receipts. These thresholds were INR 75,00,000 and 50,00,000 respectively under the 2020 directions. Such loans may also be extended to group entities such as farmer producer organisations and cooperatives up to a limit of INR 4,00,00,000 and INR 2,00,00,000. A sharp rise is seen from the earlier limits of INR 75,00,000 and INR 50,00,000. The limit for loans to borrowing entities undertaking farming and selling at pre-determined prices has been increased from INR 5,00,00,000 to INR 10,00,00,000.

4. Co-Lending

Scheduled Commercial Banks can now co-lend with registered NBFCs (including Housing Finance Companies) for PSL purposes, strictly in line with the revised Co-Lending Model guidelines dated November 5, 2020. Loans originated under the earlier co-origination guidelines (September 21, 2018) will remain eligible for priority sector classification only until repayment or maturity, whichever is earlier.

5. Removal of Interest Cap Provisions and Streamlined Securitisation Eligibility

Directions 2025 remove the interest margin cap that previously applied to certain PSL-linked securitisation exposures. This aligns with RBI’s approach in microfinance regulation, allowing originating NBFCs to structure loans more flexibly—though it also opens the door to potentially higher borrower-level interest rates.

Additionally, the eligibility conditions for securitisation notes have been simplified. Now, banks can classify such investments as PSL, provided:

• The underlying assets were eligible for PSL classification before securitisation; and
• The transaction complies with the RBI’s Guidelines on Securitisation of Standard Assets.

Notably, loans against gold jewellery originated by NBFCs remain explicitly excluded from PSL eligibility. This simplification may encourage banks to increase investment in securitised priority sector assets, although there is a risk of drift from the socio-economic objectives of PSL if pricing becomes less borrower-friendly.

IV. CONCLUSION

The Directions 2025 mark a calibrated shift in the priority sector lending framework, striking a balance between regulatory foresight and developmental objectives. By expanding the scope of eligible sectors, enhancing credit limits, and introducing region-sensitive incentives, the RBI has not only modernized PSL in line with emerging economic priorities—such as clean energy and start-up financing—but also reinforced its commitment to inclusive growth.