SBI Research seeks overhaul of priority sector lending norms; proposes higher loan limits for housing, education, and renewable energy
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The Reserve Bank of India's (RBI) Priority Sector Lending (PSL) framework, introduced more than five decades ago to improve credit access for underserved sectors, needs a comprehensive review to align with the country's Viksit Bharat 2047 vision, according to a report by SBI Research.
The report argues that while banks are comfortably meeting the existing PSL target, the framework should be expanded to accommodate emerging priorities such as climate finance, infrastructure, environmental, social and governance (ESG) investments, and the electric vehicle (EV) ecosystem.
Introduced in 1972, the PSL mechanism was designed to ensure adequate credit flow to sectors such as agriculture, micro and small enterprises, education, and housing. The framework has undergone several revisions over the years.
According to SBI Research, banks are currently exceeding the overall PSL target of 40% of Adjusted Net Bank Credit (ANBC), with provisional estimates indicating that priority sector lending stood at around 45% of ANBC in FY26.
The report said the evolving needs of financial inclusion warrant a fresh review of the framework. It also referred to a working paper released by the Prime Minister's Economic Advisory Council (PMEAC) in May 2026 that examined the economic impact of priority sector lending.
Among its key recommendations, SBI Research proposed bringing all infrastructure financing under the priority sector ambit or exempting such lending from ANBC calculations for PSL compliance, similar to the treatment currently available for long-term infrastructure bonds. It said the move would help channel more long-term funding towards infrastructure projects at a time when the domestic bond market remains underdeveloped.
The report also recommended creating a separate Climate Sustainability Finance category under PSL to support investments that contribute to climate goals. It further suggested allowing investments in green bonds, ESG bonds and sovereign green bonds to qualify as priority sector lending.
SBI Research also proposed revising several loan limits that determine PSL eligibility. It recommended increasing the renewable energy lending cap from ₹35 crore to ₹100 crore for power generation projects while raising the limit for rooftop solar loans to individual households from ₹10 lakh to ₹2 crore.
For housing loans, the report suggested increasing the PSL eligibility threshold to ₹1 crore in metro cities and ₹75 lakh in non-metro centres, noting that the average ticket size of new home loans has risen to ₹45-50 lakh and is approaching the current eligibility limits. It also proposed bringing intermediated housing loans within the PSL framework.
In education, the report recommended doubling the existing PSL loan limit for individual borrowers from ₹25 lakh to ₹50 lakh, citing the sharp rise in the cost of higher education in India and overseas.
The report also proposed increasing the cap on social infrastructure loans to ₹25 crore across all cities. It also suggested raising the lending limits for loans extended by banks to non-banking financial companies (NBFCs) for onward lending to ₹25 lakh per agricultural borrower and ₹50 lakh for other categories.
SBI Research also recommended that loans extended under all government-sponsored schemes should automatically qualify as lending to micro enterprises and weaker sections, irrespective of whether a Unique Registration Number (URN) is available.
The report called for reforms to the Rural Infrastructure Development Fund (RIDF), managed by National Bank for Agriculture and Rural Development. It proposed exempting RIDF deposits from risk-weight and capital adequacy (CRAR) calculations, arguing that such deposits are regulatory in nature and should be treated similarly to statutory liquidity ratio (SLR) investments.
It also recommended linking the interest rate on RIDF deposits to the prevailing bank rate and removing penal charges for banks falling short of PSL sub-targets. According to the report, a cost-benefit analysis indicates that banks currently find it more profitable to purchase Priority Sector Lending Certificates (PSLCs) than invest in RIDF.
It noted that as India's economic priorities evolve, the PSL framework should move beyond its traditional sectors to support infrastructure development, climate transition, and sustainable finance while continuing to strengthen financial inclusion and credit access for underserved sections of society.