Revised PSL norms to improve bank credit to weaker section, boost financial inclusion

Reserve Bank of India

The Reserve Bank of India's (RBI) revised guidelines on the Priority Sector Lending (PSL) is expected to improve the bank credit flow to the priority sectors, boost financial inclusion and make credit more accessible to weaker sections and women entrepreneurs, according to the brokerages.

As per an IIFL report, bank credit flow to the priority sector may include housing, clean energy, start-ups and education.

“This circular individually does not impact fundamentals of banks to a large extent, in our view, this along with other measures taken indicate RBI's focus on having a more relaxed approach, which could help banks,” a Macquarie report said.

On March 24, RBI issued revised guidelines on Priority Sector Lending (PSL) to facilitate better targeting of bank credit to the priority sectors of the economy. The new guidelines will come into effect from April 1, 2025, the RBI said.

"The enhanced coverage of the revised guidelines is expected to facilitate better targeting of bank credit to the priority sectors of the economy," the RBI stated.

The major changes in the new norms include the enhancement of several loan limits, including housing loans for enhanced PSL coverage, and the broadening of the purposes based on which loans may be classified under 'renewable energy.'

Motilal Oswal, in its report, said that these measures are incrementally positive for the sector as a whole, with banks like HDFC Bank, ICICI Bank, SBI, Axis Bank, etc. being the largest beneficiaries of the same.

The IIFL report also said that the easing of PSL guidelines should help banks with relatively lower organic PSL generation such as RBL Bank, IndusInd Bank and Federal Bank in Financial year 2023-24.

The report added that IndusInd Bank and Federal Bank have 32 percent organic PSL as a % of opening calculated ANBC in FY24.

Further, RBL Bank, State Bank of India, ICICI Bank and IndusInd Bank are required to meet the shortfall via PSLC purchase, IIFL report said.

Bank loans to the housing sector for priority sector classification have been prescribed in three categories:

Rs 50 lakh for centres with a population of 50 lakh and above, Rs 45 lakh for centres with a population of 10 lakh and above but below 50 lakh, and Rs 35 lakh for centres with a population below 10 lakh. The maximum cost of dwelling units has also been specified for each case.