Every bank in India must lend a fixed share of its credit to sectors that markets on their own tend to underserve: farmers, micro enterprises, the poor, low-cost housing, education and a few others. This is priority sector lending (PSL). For a domestic commercial bank, the share is 40% of adjusted net bank credit (ANBC) or of the credit equivalent of off-balance sheet exposures (CEOBSE), whichever is higher. Within that, 18% must go to agriculture, 10% to small and marginal farmers, 7.5% to micro enterprises and 12% to weaker sections. Banks that lend more than they must can sell the surplus as priority sector lending certificates (PSLCs). Banks that fall short and do not buy enough PSLCs must deposit the shortfall at low interest in the Rural Infrastructure Development Fund (RIDF) and similar funds. The rulebook is the RBI's Priority Sector Lending – Targets and Classification Directions, 2025, in force since 1 April 2025 and amended three times in 2026.
This part goes deeper than the short summary in the functions and responsibilities of the RBI (Part 2), which places PSL among the RBI's development functions, and how monetary policy works in India (Part 3), which calls PSL the main surviving form of directed credit. For the banks themselves, see the structure of Indian banking (Part 21), small finance and payments banks (Part 33), co-operative banks and RRBs (Part 34) and microfinance and financial inclusion (Part 32).
In the news
- 11 September 2026: FCNR window cut short. The Third Amendment Directions moved the end date of the ANBC exclusion for advances against fresh FCNR(B) deposits (from 8 June) and NRE term deposits of three years or more (from 19 June) from 30 September to 31 August 2026, in line with an amendment to the CRR and SLR rules dated 25 August 2026. Why it matters for the exam: a change to the CRR/SLR exemption flows straight into the PSL base.
- 7 August 2026: dollar deposits kept out of ANBC. The Second Amendment Directions excluded from ANBC the advances a bank makes out of these fresh FCNR(B) and NRE deposits, which were already exempt from CRR and SLR. The old exclusion for FCNR(B)/NRE deposits of 2013 was deleted. Why it matters for the exam: a smaller ANBC means a smaller PSL target, so banks have one less reason to resist raising dollar deposits.
- 7 July 2026: SBI calls for a full review. An SBI Research report, Viksit Bharat Demands Comprehensive Review of PSL Guidelines, put provisional PSL achievement for 2025-26 at 45% of ANBC, against 43.6% in 2024-25. It proposed higher limits (₹1 crore for home loans in metro centres, ₹50 lakh for education, ₹100 crore for renewable energy) and a "Climate Sustainability Finance" category. Why it matters for the exam: these are proposals, not rules; the current limits are lower.
- May 2026: EAC-PM study on PSL. The Economic Advisory Council to the Prime Minister published Working Paper 48/2026, Economic impact analysis of Priority Sector Lending. Using district data for 2020–2025, it found that faster PSL growth did not significantly raise a district's output over two years, and that PSLCs let banks specialise without changing the regional spread of credit. Why it matters for the exam: it is the latest official critique of PSL and useful for ESI answers.
- 30 March 2026: Parliament told of shortfall-funded refinance. In a Lok Sabha reply, the Finance Ministry said concessional refinance reaches rural lenders through funds created out of PSL shortfall: the Short-Term Cooperative Rural Credit Fund, the Short-Term RRB Credit Refinance Fund and the Long-Term Rural Credit Fund. Why it matters for the exam: RIDF is not the only fund that shortfall money goes into.
- 19 January 2026: first amendment to the 2025 Directions. The RBI cut the overall PSL target for small finance banks from 75% to 60%, with immediate effect, made bank loans to the National Cooperative Development Corporation (NCDC) for on-lending eligible, and required external auditors' certificates to stop the same loan being claimed twice. Why it matters for the exam: SFBs and UCBs now share a 60% target; RRBs remain at 75%.
Why India directs credit
Left to themselves, banks prefer large, well-documented borrowers. A small farmer or a tiny workshop has little collateral, no audited accounts and needs small loans that cost a lot to process. The EAC-PM paper lists the textbook reasons for "credit market failure": information asymmetry, the preference of large banks for large firms, high transaction costs and social bias. PSL tries to correct this by mandating a quantity of credit, not by subsidising its price. Interest rates on PSL loans follow the normal rules on interest on advances.
The policy has two aims that pull in different directions. One is equity: credit for small and marginal farmers, micro enterprises and weaker sections. The other is growth: credit for sectors such as exports, medium enterprises, renewable energy and social infrastructure, which were added over the years. Much of the debate about PSL is about whether the second aim has diluted the first.
History: from persuasion to targets
Social control and nationalisation (1967–1969)
The idea came before the targets. In his budget speech for 1967-68, the Deputy Prime Minister and Finance Minister Morarji Desai spoke of a larger expansion of bank credit to agriculture and industry. At a meeting of the National Credit Council in July 1968, commercial banks were asked to raise their lending to the "priority sectors", then agriculture and small-scale industries. A list of qualifying farm advances went to banks in March 1969, and the nationalisation of 14 major banks in July 1969 came with a push to lend to borrowers of small means.
Formal definition (1972) and the first target (1974)
The RBI set up an Informal Study Group on Statistics relating to Advances to the Priority Sectors in May 1971. On the basis of its report, the description of the priority sectors was formalised in 1972, with a new reporting return and guidelines issued in February 1972. There was still no number. In November 1974, public sector banks were asked to raise priority sector advances to one-third (33⅓%) of their total advances by March 1979. Private banks received a similar direction in November 1978.
The Krishnaswamy Working Group (1980)
In March 1980, at a meeting of the Finance Minister with the chief executives of public sector banks, the banks agreed to aim for 40% by March 1985. The RBI appointed a Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic Programme by Banks, chaired by Dr K. S. Krishnaswamy, then an Executive Director of the RBI, on 13 March 1980. On its recommendations, the RBI told all commercial banks on 29 October 1980 to reach:
- 40% of aggregate advances to the priority sector by 1985;
- a sub-target for agriculture (16% of net bank credit by 1984-85);
- sub-targets for weaker sections, such as small and marginal farmers and landless labourers within agriculture.
The group also suggested widening the priority sector to cover housing loans to SCs, STs and weaker sections, and consumption loans to the poor. The 40% figure set in 1980 is still the headline target today.
Extensions and revisions
- Foreign banks got a target of 15% of net bank credit by 1991-92, raised to 32% by 1993-94. The 32% survives as the export credit allowance for foreign banks with fewer than 20 branches.
- Urban co-operative banks were brought in after a 1983 committee chaired by Deputy Governor M. V. Hate, with a 60% target that was cut to 40% in 2007.
- RRBs had to reach 40% from 1997-98, 60% from 2003-04 and 75% from 1 January 2016.
- 2015: a major revision added medium enterprises, social infrastructure and renewable energy, and announced PSLCs.
- 2020: the Directions of 4 September 2020 raised the small and marginal farmer target to 10% and the weaker sections target to 12% in steps up to 2023-24, and introduced district weights.
- 2025: the current Directions, issued on 24 March 2025 and effective 1 April 2025.
The eight categories
Under paragraph 5 of the 2025 Directions there are eight categories. Each loan may be placed in only one of them. The main limits are:
| Category | What qualifies (main limits) |
|---|---|
| Agriculture | Farm credit to individual farmers (no ceiling); corporate farmers, FPOs and co-operatives up to ₹4 crore; agriculture infrastructure and food and agro-processing up to ₹100 crore per borrower from the banking system; agri start-ups up to ₹50 crore |
| MSME | All bank loans to micro, small and medium enterprises; MSME start-ups up to ₹50 crore; with-recourse factoring and TReDS |
| Export credit | Incremental export credit up to 2% of ANBC (₹50 crore per borrower) for domestic banks, SFBs and UCBs; up to 32% for foreign banks with fewer than 20 branches |
| Education | Loans to individuals, including vocational courses, up to ₹25 lakh |
| Housing | ₹50 lakh / ₹45 lakh / ₹35 lakh by city size (below) |
| Social infrastructure | Schools, drinking water and sanitation up to ₹8 crore; health care in Tier II–VI centres up to ₹12 crore |
| Renewable energy | Up to ₹35 crore per borrower; ₹10 lakh per household |
| Others | Loans to SHGs/JLGs up to ₹2 lakh for non-farm, non-MSME purposes; up to ₹1 lakh to distressed persons to repay moneylenders; other start-ups up to ₹50 crore |
Housing limits after 2025
The 2025 Directions linked housing limits to the population of the centre, using Census 2011 urban agglomerations. To qualify, a loan must meet both the loan limit and the limit on the cost of the house:
| Population of centre | Loan limit | Maximum cost of dwelling |
|---|---|---|
| 50 lakh and above | ₹50 lakh | ₹63 lakh |
| 10 lakh to below 50 lakh | ₹45 lakh | ₹57 lakh |
| Below 10 lakh | ₹35 lakh | ₹44 lakh |
Under the 2020 Directions the limits were ₹35 lakh in metropolitan centres (population of 10 lakh or more, house cost up to ₹45 lakh) and ₹25 lakh elsewhere (house cost up to ₹30 lakh). Repair loans now go up to ₹15 lakh, ₹12 lakh and ₹10 lakh respectively. Housing loans to a bank's own staff never qualify.
What else changed in 2025
Comparing the 2020 and 2025 Directions:
- Education: ₹20 lakh → ₹25 lakh.
- Renewable energy: ₹30 crore → ₹35 crore per borrower, and wider eligible purposes (the household limit stayed at ₹10 lakh).
- Social infrastructure: ₹5 crore → ₹8 crore for schools, water and sanitation; ₹10 crore → ₹12 crore for health care.
- UCBs: overall target set at 60% from 2024-25. A 2023 circular had set a path to 75% by March 2026; the 2025 revision dropped it.
- Weaker sections: the list was widened (it now includes persons with disabilities, transgenders and notified minorities), and the ₹2 lakh cap on loans to individual women no longer applies to UCBs.
- Non-corporate farmers: a fixed 14% sub-target replaced the old system-wide average (13.78% for 2022-23).
Weaker sections: an overlapping group
Weaker sections is not a ninth category. It is a label for loans already counted under one of the eight categories when the borrower is, for example, a small or marginal farmer, an SC or ST, an SHG or JLG member, a person with a disability, a transgender person, a member of a notified minority, a woman borrowing up to ₹2 lakh, or an artisan with a credit limit up to ₹2 lakh. One loan to a marginal farmer counts for agriculture, NCF, SMF and weaker sections at once.
Targets and sub-targets by bank type
All targets are a share of ANBC or CEOBSE, whichever is higher, measured as on the corresponding date of the preceding year:
| Target | Domestic banks and foreign banks with 20+ branches | Foreign banks with under 20 branches | RRBs | SFBs | UCBs |
|---|---|---|---|---|---|
| Total PSL | 40% | 40% (up to 32% export credit, at least 8% other) | 75% | 60% | 60% |
| Agriculture | 18% | — | 18% | 18% | — |
| of which non-corporate farmers | 14% | — | 14% | 14% | — |
| of which small and marginal farmers | 10% | — | 10% | 10% | — |
| Micro enterprises | 7.5% | — | 7.5% | 7.5% | 7.5% |
| Weaker sections | 12% | — | 15% | 12% | 12% |
Points to note:
- The 14% for NCFs includes the 10% for SMFs, and both sit inside the 18% for agriculture. They do not add up to 42%.
- RRBs count lending to medium enterprises, social infrastructure and renewable energy only up to 15% of ANBC, so most of their 75% must come from farmers, micro enterprises and the poor.
- SFBs may buy PSLCs only to meet sub-targets, not the overall target, since they are expected to lend to the priority sector themselves.
- Small and marginal farmers: marginal farmers hold up to 1 hectare, small farmers more than 1 and up to 2 hectares. Landless labourers, tenant farmers and sharecroppers within these limits also count.
District weights
To spread credit more evenly, since 2024-25 the RBI gives a 125% weight to incremental priority sector credit in districts where per capita PSL credit is below ₹9,000, and a 90% weight in districts where it is above ₹42,000. All other districts get 100%. The lists are valid up to 2026-27. RRBs, UCBs, LABs and foreign banks are exempt.
Example. A bank adds ₹1,000 crore of priority sector loans in a low-credit district and ₹1,000 crore in a high-credit district.
- Low-credit district: ₹1,000 crore × 125% = ₹1,250 crore counted.
- High-credit district: ₹1,000 crore × 90% = ₹900 crore counted.
- Total counted: ₹2,150 crore for ₹2,000 crore actually lent.
The bank reports actual amounts; the RBI makes the weight adjustment itself, using district data.
Adjusted Net Bank Credit
The formula
Targets are a percentage of ANBC, so how ANBC is defined decides how much a bank must lend. Paragraph 6.1 of the 2025 Directions builds it in steps:
| Item | What it is | Sign |
|---|---|---|
| I | Bank credit in India (Form A, Section 42(2) of the RBI Act) | |
| II | Bills rediscounted with the RBI and approved financial institutions | |
| III | Net bank credit (NBC) = I − II | Start |
| IV | Outstanding shortfall deposits in RIDF and other funds with NABARD, NHB, SIDBI and MUDRA, plus outstanding PSLCs | Add |
| V | Eligible exemption for long-term bonds issued for infrastructure and affordable housing | Subtract |
| VI | Advances out of fresh FCNR(B)/NRE deposits exempt from CRR and SLR (2026 window) | Subtract |
| VII | Public sector banks' investments in government recapitalisation bonds | Subtract |
| VIII | Other investments that count as priority sector, such as securitisation notes | Add |
| IX | Non-SLR bonds and debentures held to maturity (HTM) | Add |
ANBC (banks other than UCBs) = III + IV − (V + VI + VII) + VIII + IX
The logic: shortfall deposits and priority-sector investments are added because they count towards achievement, so the base must include them too. Money raised through infrastructure bonds, and since August 2026 certain dollar deposits, is taken out so that banks are not penalised for raising long-term or foreign funds. Provisions and accrued interest are not netted from NBC for PSL purposes.
Worked example
An illustrative public sector bank, figures in ₹ crore, as on 31 March 2026:
| Step | Item | ₹ crore |
|---|---|---|
| I | Bank credit in India | 8,00,000 |
| II | Bills rediscounted | 4,000 |
| III | NBC = I − II | 7,96,000 |
| IV | RIDF and other shortfall deposits | 14,000 |
| V | Infrastructure and affordable housing bond exemption | 30,000 |
| VI | Advances out of fresh FCNR(B)/NRE deposits | 6,000 |
| VII | Recapitalisation bonds | 10,000 |
| VIII | Investments in priority sector securitisation notes | 8,000 |
| IX | Non-SLR bonds held to maturity | 12,000 |
ANBC = 7,96,000 + 14,000 − (30,000 + 6,000 + 10,000) + 8,000 + 12,000 = 8,10,000 − 46,000 + 20,000 = ₹7,84,000 crore
The bank's CEOBSE is ₹95,000 crore, which is lower, so ANBC is the base. Because targets use the corresponding date of the preceding year, these are the bank's targets for 2026-27:
- Total PSL: 40% × 7,84,000 = ₹3,13,600 crore
- Agriculture: 18% = ₹1,41,120 crore
- Non-corporate farmers: 14% = ₹1,09,760 crore
- Small and marginal farmers: 10% = ₹78,400 crore
- Micro enterprises: 7.5% = ₹58,800 crore
- Weaker sections: 12% = ₹94,080 crore
Without items V to VII, ANBC would be ₹8,30,000 crore and the overall target ₹3,32,000 crore. The exclusions save the bank ₹18,400 crore of required priority sector lending.
How achievement is measured
Achievement is checked every quarter. For each quarter the shortfall or excess is computed separately, and the simple average of the four quarters decides the year's result. This stops a bank from window-dressing on 31 March alone. Sub-targets are measured the same way.
A bank's achievement is the sum of its outstanding priority sector loans plus the net nominal value of PSLCs bought minus PSLCs sold. Inorganic routes also count, within limits:
- investments in securitisation notes, direct assignment and inter-bank participation certificates (IBPCs) backed by priority sector loans;
- loans to NBFC-MFIs for on-lending to individuals and SHG/JLG members;
- loans to NBFCs, HFCs and, since January 2026, NCDC for on-lending, capped at 5% of the bank's total PSL of the previous year;
- co-lending with NBFCs;
- shortfall deposits with RIDF and the other funds.
Misclassifications found by RBI supervisors are taken out of the achievement of the year they relate to, and the resulting shortfall is allocated in later years. Missing targets also counts against a bank when it seeks regulatory approvals.
Priority Sector Lending Certificates
The idea
Banks are not equally good at every kind of lending. An SFB in rural Odisha can lend to small farmers cheaply; a foreign bank in Mumbai cannot. PSLCs let the specialist lend more and sell the fulfilment of the obligation, not the loan, to a bank that lends less. The PSL scheme announced PSLCs in April 2015; the Government notified dealing in PSLCs as a permitted business under Section 6(1)(o) of the Banking Regulation Act on 4 February 2016, and the RBI launched trading on 7 April 2016.
The rules
Under Annex IIIA of the 2025 Directions:
- What is sold: only the priority sector achievement. There is no transfer of the loan or of credit risk, and no cash flow from the underlying loans changes hands.
- Platform: the RBI's core banking portal, e-Kuber, where settlement also takes place.
- Who trades: scheduled commercial banks, RRBs, LABs, SFBs and UCBs.
- Lot size: ₹25 lakh and multiples.
- Fee: market-determined, paid by buyer to seller. The buyer books it as an expense, the seller as miscellaneous income.
- Expiry: every PSLC expires on 31 March, whenever it was sold.
- Issue without underlying loans: up to 50% of the previous year's PSL achievement, but the seller must still meet its own target on each reporting date.
- Disclosure: both sides report category-wise PSLCs sold and bought in the notes to their balance sheets.
The four types
| Type | Represents | Counts towards |
|---|---|---|
| PSLC-Agriculture | Agriculture loans other than to SMFs | Agriculture target and overall target |
| PSLC-SF/MF | Loans to small and marginal farmers | SMF, NCF, weaker sections, agriculture and overall |
| PSLC-Micro Enterprises | Loans to micro enterprises | Micro enterprise sub-target and overall |
| PSLC-General | All other priority sector loans | Overall target only |
A bank short on a sub-target must buy that specific type. A bank short only on the overall target can buy any type. The SF/MF certificate counts for the most targets, which is why it is in heavy demand.
Worked example: when to buy
A private bank expects an average overall shortfall of ₹10,000 crore for 2026-27, about 2.5 percentage points of its ANBC of ₹4,00,000 crore.
- Option A, buy PSLC-General: at an illustrative fee of 1%, the cost is ₹10,000 crore × 1% = ₹100 crore, paid once. The bank's ₹10,000 crore stays free to lend or invest.
- Option B, do nothing: the RBI allocates ₹10,000 crore to RIDF and other funds. With a shortfall under 5 points, the rate is Bank Rate − 2 = 5.75% − 2% = 3.75%. If the bank could otherwise earn 6.5% on government bonds, it loses 6.5% − 3.75% = 2.75% a year, or ₹275 crore a year for as long as the deposit runs.
PSLCs are cheaper unless fees rise very high. SBI Research made a similar calculation in July 2026: even at a 3% fee, buying PSLCs beat a RIDF deposit for its sample bank, after counting the capital banks must hold against RIDF deposits.
How big the market has become
PSLC trading grew from about ₹0.5 lakh crore in 2016-17 to ₹12.2 lakh crore in 2024-25, according to RBI data compiled by SBI Research. In 2023-24 it was ₹8.9 lakh crore, of which PSLC-SF/MF alone was ₹4.15 lakh crore. Private sector banks made 49.2% of sales that year, against 20.7% for public sector banks.
Who buys and who sells? The EAC-PM paper found that, on average, SBI is a net buyer (about 4.29% of its ANBC), while SFBs (about 15.6% of ANBC) and nationalised banks (about 1.83%) are net sellers. Private banks were net buyers in the early years and turned net sellers from 2022-23: they buy agriculture certificates and sell micro enterprise ones. Foreign banks are likely net buyers.
Shortfall: RIDF and other funds
Where the money goes
When a bank misses its overall target or a sub-target, the RBI allocates the shortfall to funds held with development institutions, on terms the RBI sets:
- RIDF and other funds with NABARD, counted under agriculture;
- funds with SIDBI and MUDRA Ltd, counted under MSME;
- funds with the National Housing Bank (NHB), counted under housing.
UCBs under all-inclusive directions are exempt from these allocations. Because outstanding deposits count towards achievement (and are added back into ANBC), a bank that misses its target one year carries part of the shortfall as deposits in later years.
RIDF: the origin
The Rural Infrastructure Development Fund was announced by Finance Minister Manmohan Singh in the 1995-96 Budget, to be set up within NABARD from April 1995. States had left many rural infrastructure projects, such as irrigation, soil conservation and watershed works, unfinished for lack of money. RIDF would lend to state governments and state-owned corporations to finish them. Its resources would come from commercial banks, which the RBI would require to contribute the amount of their shortfall in agricultural lending, up to 1.5% of net credit. The expected first corpus was about ₹2,000 crore. Outstanding shortfall deposits of banks in RIDF and similar funds were about ₹1.9 lakh crore at the end of 2024-25, according to SBI Research.
The interest rate penalty
Shortfall deposits earn interest below the Bank Rate, now 5.75%:
| Shortfall in the overall target | Deposit rate | Rate now |
|---|---|---|
| Less than 5 percentage points | Bank Rate − 2 points | 3.75% |
| 5 to less than 10 points | Bank Rate − 3 points | 2.75% |
| 10 points or more | Bank Rate − 4 points | 1.75% |
| No overall shortfall, but a sub-target shortfall | Bank Rate − 2 points | 3.75% |
The penalty is the gap between these rates and what the bank could earn elsewhere, which grows with the size of the miss.
Example. Take the bank from the ANBC example. Its four quarter-end achievements average ₹2,66,560 crore, or 34% of ANBC.
- Shortfall = ₹3,13,600 − ₹2,66,560 = ₹47,040 crore, which is 40% − 34% = 6 percentage points.
- Rate band: 5 to under 10 points, so Bank Rate − 3 = 2.75%.
- Interest earned in a year: ₹47,040 crore × 2.75% = ₹1,293.6 crore.
- At 6.5% elsewhere it would have earned ₹3,057.6 crore. The annual cost of missing the target is about ₹1,764 crore.
The trouble with PSL: critiques
Inorganic achievement
The system as a whole has met the 40% target every year since 2017-18. SBI Research, using RBI data, shows that PSL was 43.6% of ANBC in 2024-25, but only 34.4% after removing PSLCs and RIDF deposits. The "organic" share has stayed between about 34% and 38% since 2016-17. Banks meet the target on paper partly by trading certificates and parking money with NABARD, not by lending more to farmers and small firms.
Skewed distribution
The EAC-PM study found that the 63 outlier districts, mostly state capitals and industrial centres, held about 45.8% of all outstanding priority sector advances. Himalayan and north-eastern states, eastern Uttar Pradesh, Bihar, Jharkhand, Odisha and parts of Madhya Pradesh and Rajasthan remain underserved. It also found that banks lending in underserved regions tend to be PSLC buyers and those in well-served districts sellers, so PSLCs may worsen regional disparity. The 125% and 90% district weights are the RBI's attempt to counter this.
Weak link to growth
The same study found no significant effect of PSL growth on district output over two years, and a national output elasticity of about 0.19, lower than its estimate for public capital spending. It suggested refocusing PSL on its social goals: keep sub-targets for small farmers, non-corporate farmers, micro enterprises and weaker sections, drop legacy categories and lower the overall target.
Category creep and stale limits
Since 1980 the priority sector has grown to include medium enterprises, exports, start-ups up to ₹50 crore, renewable energy and social infrastructure. Critics say this lets banks meet targets with large loans that the market would fund anyway. Banks argue the opposite: SBI Research says limits such as ₹35 crore for renewable energy and ₹50 lakh for home loans are too low for today's costs, and that infrastructure lending should count.
Cost to banks
Directed lending can raise costs and bad loans, and the RIDF route earns well below market rates. SBI Research has asked for RIDF deposits to be exempt from risk weights, since banks place them under a regulatory mandate, much as they hold SLR securities.
What PSLCs got right
The EAC-PM paper calls PSLCs effective and efficient: the system still meets 40%, but each bank can lend where it is strongest. SFBs and specialist lenders earn fee income for lending they do well, and large banks pay for the fulfilment they lack.
Common exam traps
ANBC or CEOBSE, whichever is higher. It is not the sum of the two. And the base is the corresponding date of the preceding year, not the current date.
Sub-targets nest. SMF 10% is inside NCF 14%, which is inside agriculture 18%. Weaker sections (12%) overlap with all of them.
SFB and UCB both 60%; RRB 75%. The SFB cut from 75% came on 19 January 2026, not in March 2025. The UCB target became 60% in the March 2025 revision.
Foreign banks with under 20 branches have only the 40% overall target, of which up to 32% can be export credit. They have no sub-targets.
PSLCs move achievement, not loans. No credit risk is transferred. All PSLCs expire on 31 March.
PSLC-SF/MF counts for five targets: SMF, NCF, weaker sections, agriculture and overall.
SFBs may buy PSLCs only to meet sub-targets.
Shortfall rates are linked to the Bank Rate, not the repo rate.
RIDF sits with NABARD, was set up in 1995-96, and lends to state governments.
Eight categories, not nine: weaker sections is an overlapping group.
Key facts at a glance
| Rulebook | RBI (Priority Sector Lending – Targets and Classification) Directions, 2025, issued 24 March 2025, effective 1 April 2025 |
| Amendments | 19 January 2026; 7 August 2026 (Second); 11 September 2026 (Third) |
| Legal basis | Sections 21 and 35A read with Section 56 of the Banking Regulation Act, 1949 |
| Overall target | 40% of ANBC or CEOBSE (domestic banks, foreign banks with 20+ branches) |
| Other targets | RRBs 75%; SFBs 60% (from 19 January 2026); UCBs 60% |
| Agriculture | 18%, of which NCF 14%, of which SMF 10% |
| Micro enterprises | 7.5% |
| Weaker sections | 12% (RRBs 15%) |
| Categories | Eight: agriculture, MSME, export credit, education, housing, social infrastructure, renewable energy, others |
| Housing limits | ₹50 lakh / ₹45 lakh / ₹35 lakh by city population |
| Education limit | ₹25 lakh |
| Renewable energy | ₹35 crore per borrower; ₹10 lakh per household |
| District weights | 125% (per capita PSL below ₹9,000); 90% (above ₹42,000); valid to 2026-27 |
| PSLCs | Since 7 April 2016; four types; e-Kuber; lot ₹25 lakh; expire 31 March |
| PSLC volume | ₹12.2 lakh crore in 2024-25 |
| Shortfall | RIDF (NABARD), SIDBI, MUDRA, NHB at Bank Rate minus 2 to 4 points |
| History | Defined 1972; 33⅓% target 1974; 40% target from Krishnaswamy Working Group, 1980 |
Exam corner: what to remember
- PSL directs a quantity of credit. Formalised in 1972, first target of 33⅓% in November 1974, 40% by 1985 on the Krishnaswamy Working Group's recommendations (instructions of 29 October 1980).
- Targets are a share of ANBC or CEOBSE, whichever is higher, as on the corresponding date of the previous year, monitored quarterly and averaged over four quarters.
- Domestic banks: 40 / 18 / 14 / 10 / 7.5 / 12 (total, agriculture, NCF, SMF, micro, weaker sections). RRBs 75%, SFBs 60%, UCBs 60%, foreign banks with under 20 branches 40% with up to 32% export credit.
- ANBC = NBC + shortfall deposits and PSLCs − (infrastructure bond exemption + 2026 FCNR/NRE advances + recap bonds) + PSL investments + non-SLR HTM bonds.
- 2025 changes: higher housing limits (₹50/45/35 lakh), education ₹25 lakh, renewable energy ₹35 crore, UCB target 60%, a wider weaker sections list, a fixed NCF 14%.
- 2026 changes: SFB target 60% and NCDC on-lending (19 January); FCNR(B)/NRE advances out of ANBC (7 August), window ended 31 August (11 September).
- PSLCs: four types (Agriculture, SF/MF, Micro Enterprises, General), traded on e-Kuber, lot ₹25 lakh, expire 31 March, no risk transfer, up to 50% of last year's achievement without underlying loans. Volume ₹12.2 lakh crore in 2024-25.
- Shortfall: RIDF with NABARD (set up in 1995-96) and funds with SIDBI, MUDRA and NHB, at Bank Rate minus 2, 3 or 4 points.
- Critiques: inorganic achievement (organic PSL only 34.4% of ANBC in 2024-25), regional skew, weak growth effect (EAC-PM, May 2026), category creep.
For exam-specific syllabus and pattern details, see our pages for RBI Grade B, SBI PO and IBPS PO.
Test yourself
With effect from 19 January 2026, the overall priority sector lending target for small finance banks is:
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Answer: (c) The Amendment Directions of 19 January 2026 cut the SFB target from 75% to 60%, the same as UCBs.
The RBI's Second Amendment Directions of 7 August 2026 excluded from ANBC the advances made out of:
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Answer: (b) Advances against fresh FCNR(B) and long-term NRE deposits from the June 2026 windows were excluded; the Third Amendment ended the window on 31 August 2026.
Within the 18% agriculture target for a domestic commercial bank, the sub-target for non-corporate farmers is:
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Answer: (d) NCFs have 14%, of which 10% is for small and marginal farmers; both sit inside the 18%.
A bank's ANBC on the relevant date is ₹5,00,000 crore and its CEOBSE is ₹60,000 crore. Its micro enterprises target is:
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Answer: (b) ANBC is higher than CEOBSE, so the target is 7.5% × ₹5,00,000 crore = ₹37,500 crore.
With the Bank Rate at 5.75%, a bank whose overall PSL shortfall is 6 percentage points will earn what rate on its RIDF deposit?
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Answer: (a) A shortfall of 5 to under 10 points earns the Bank Rate minus 3 points: 5.75% − 3% = 2.75%.
A PSLC-SF/MF counts towards each of the following EXCEPT:
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Answer: (c) PSLC-SF/MF counts for SMF, NCF, weaker sections, agriculture and overall targets, but not micro enterprises.
Under the 2025 Directions, the maximum housing loan eligible for PSL in a centre with a population of 50 lakh or more is:
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Answer: (d) The loan limit is ₹50 lakh, and the dwelling may cost up to ₹63 lakh; both conditions must be met.
On the recommendations of the Krishnaswamy Working Group, banks were asked to raise priority sector advances to 40% of total advances by:
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Answer: (d) The RBI's instructions of 29 October 1980 set the 40% target for 1985; the earlier 33⅓% target was for March 1979.
A bank may issue PSLCs without having the underlying loans in its books up to:
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Answer: (a) It may issue up to 50% of the previous year's achievement, but must still meet its own target on each reporting date.
For a foreign bank with fewer than 20 branches, export credit can make up at most how much of the 40% PSL target?
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Answer: (c) Up to 32% can be export credit and at least 8% must go to other priority sectors.
Further reading
- RBI, Master Directions on Priority Sector Lending – Targets and Classification, 2025: the current rulebook, updated to September 2026, with all limits, the ANBC table, the PSLC scheme and a worked shortfall calculation in Annex V.
- EAC-PM Working Paper 48/2026, Economic impact analysis of Priority Sector Lending: a detailed history, district-level data and the strongest recent case for reforming PSL.
- SBI Research, Viksit Bharat Demands Comprehensive Review of PSL Guidelines (7 July 2026): a banker's view, with the organic and inorganic split, PSLC volumes and a PSLC-versus-RIDF calculation.
- RBI, Master Circular on Lending to Priority Sector (1 July 2011): the RBI's own short history from 1968 to the Krishnaswamy Working Group.
- RBI circular on Priority Sector Lending Certificates (7 April 2016): the launch of PSLC trading on e-Kuber.
- Union Budget speech, 1995-96: paragraph 12 announces RIDF and explains why it was funded from banks' agricultural shortfall.
- RBI, Master Directions on Priority Sector Lending, 2020: the previous rulebook, useful for comparing the old limits with the new ones.
Sources
- RBI, Master Directions – Priority Sector Lending – Targets and Classification Directions, 2025: issue and effective dates, applicability, eight categories, ANBC computation, targets by bank type, district weights, all category limits, weaker sections list, on-lending caps, PSLC scheme, shortfall rates, footnotes on the 2026 amendments (accessed 24 October 2026)
- RBI press release, RBI releases revised priority sector lending guidelines, 24 March 2025: higher loan limits, wider renewable energy coverage, UCB target of 60%, wider weaker sections list (accessed 24 October 2026)
- RBI press release, amendment directions on PSL, 19 January 2026: purpose of the 2026 amendment, NCDC added for on-lending (accessed 24 October 2026)
- RBI notification, PSL (Amendment) Directions, 2026: SFB target cut from 75% to 60%, immediate effect (accessed 24 October 2026)
- TaxGuru, RBI PSL Amendment Directions, 2026: summary of the January 2026 changes, including auditor certificates, the on-lending cap and district list changes (accessed 24 October 2026)
- RBI notification, PSL Third Amendment Directions, 11 September 2026 (RBI/2026-27/256): the Second Amendment of 7 August 2026 excluded advances against fresh FCNR(B) and NRE deposits from ANBC; the end date moved from 30 September to 31 August 2026 (accessed 24 October 2026)
- RBI, Master Directions on PSL, 2020: earlier housing, education, renewable energy and social infrastructure limits; SFB 75%; phased SMF and weaker sections targets; NCF target of 13.78% for 2022-23 (accessed 24 October 2026)
- RBI notification, Review of PSL targets for UCBs, 8 June 2023: UCB path of 60%, 65% and 75% by March 2026, later replaced (accessed 24 October 2026)
- RBI, Master Circular on Lending to Priority Sector, 1 July 2011: National Credit Council 1968, 1972 formalisation, 1974 target of 33⅓%, March 1980 meeting, Krishnaswamy Working Group and the 40% target (accessed 24 October 2026)
- National Virtual Library of India, Report of the Working Group on modalities of implementation of priority sector lending and the 20-point economic programme: the report's 1980 date and K. S. Krishnaswamy as chairman (accessed 24 October 2026)
- EAC-PM Working Paper 48/2026, Economic impact analysis of Priority Sector Lending, May 2026: history from 1967-68 to 2016, 29 October 1980 instructions, extensions to foreign banks, UCBs and RRBs, PSLC buyers and sellers, district skew, growth findings and recommendations (accessed 24 October 2026)
- SBI Research, Viksit Bharat Demands Comprehensive Review of PSL Guidelines, 7 July 2026: PSL achievement of 43.6% in 2024-25 and 45% (provisional) in 2025-26, PSLC volumes 2016-17 to 2024-25, RIDF outstanding, organic share, PSLC-versus-RIDF cost comparison, proposals (accessed 24 October 2026)
- SBI Research, Revised PSL Norms, March 2025: PSLC-SF/MF volume of ₹4.15 lakh crore and private banks' 49.2% share of sales in 2023-24 (accessed 24 October 2026)
- RBI circular, Priority Sector Lending Certificates, 7 April 2016: Government notification of 4 February 2016 under Section 6(1)(o), e-Kuber platform, original scheme (accessed 24 October 2026)
- Union Budget speech 1995-96: announcement of RIDF within NABARD from April 1995, funding from agricultural lending shortfall up to 1.5% of net credit, expected corpus of about ₹2,000 crore (accessed 24 October 2026)
- PIB, Government and RBI Measures Ensure Seamless Rural Credit Flow, 30 March 2026: Lok Sabha reply on PSL agriculture targets and funds created out of PSL shortfall (accessed 24 October 2026)
- RBI website home page, Current Rates: Bank Rate 5.75% (accessed 24 October 2026)