RBI has reduced the Priority Sector Lending target for Small Finance Banks

Source: BS

Context: The Reserve Bank of India (RBI) has reduced the Priority Sector Lending (PSL) target for Small Finance Banks (SFBs) from 75% to 60% to enhance lending flexibility and profitability.

About RBI has reduced the Priority Sector Lending target for Small Finance Banks:

• What it is? RBI’s revised PSL norms aim to ease lending restrictions for SFBs, allowing them to diversify and improve asset quality.

• RBI’s revised PSL norms aim to ease lending restrictions for SFBs, allowing them to diversify and improve asset quality.

• Old PSL Criteria: SFBs were mandated to allocate 75% of their Adjusted Net Bank Credit (ANBC) to PSL, which led to challenges in sourcing quality borrowers and lower margins.

• New PSL Criteria:

• Overall PSL target reduced from 75% to 60%. The additional PSL component reduced from 35% to 20%. SFBs still required to maintain 40% ANBC towards specific PSL sub-sectors.

• Overall PSL target reduced from 75% to 60%.

• The additional PSL component reduced from 35% to 20%.

• SFBs still required to maintain 40% ANBC towards specific PSL sub-sectors.

About Small Finance Banks (SFBs):

• What it is? SFBs are differentiated banks, providing banking services to underserved and unbanked segments of the population.

• SFBs are differentiated banks, providing banking services to underserved and unbanked segments of the population.

• Established in: Concept introduced by RBI based on Nachiket Mor Committee 2013 recommendations; licensed under Banking Regulation Act, 1949.

• Objective:

• Expand financial inclusion by serving small and marginal farmers, MSMEs, and informal sector entities. Provide basic banking services to rural and semi-urban populations. Serve as an alternative banking institution for credit-deprived sectors.

• Expand financial inclusion by serving small and marginal farmers, MSMEs, and informal sector entities.

• Provide basic banking services to rural and semi-urban populations.

• Serve as an alternative banking institution for credit-deprived sectors.

• Features:

• Can accept all deposit types. Can provide small-ticket loans with a localised operational model. Can distribute non-risk-sharing financial products (mutual funds, pensions, insurance). 25% of branches mandated in rural areas. 50% of loan portfolio to MSME sector. Minimum net worth ₹100 crore at launch, to be raised to ₹200 crore within 5 years. Required to maintain 15% Capital Adequacy Ratio (CAR) on risk-weighted assets.

• Can accept all deposit types.

• Can provide small-ticket loans with a localised operational model.

• Can distribute non-risk-sharing financial products (mutual funds, pensions, insurance).

• 25% of branches mandated in rural areas.

• 50% of loan portfolio to MSME sector.

• Minimum net worth ₹100 crore at launch, to be raised to ₹200 crore within 5 years.

• Required to maintain 15% Capital Adequacy Ratio (CAR) on risk-weighted assets.