Bridging The Credit Gap: Adapting To The Rbi’s Latest PSL Mandates

Posted On - 9 February, 2026 • By - Yash Jaisingh

India’s banking system is naturally profit-oriented, often leading to credit gaps in high-impact but underserved areas. To address this, the Reserve Bank of India (RBI) issued the Master Directions, Priority Sector Lending (PSL) 2025 on March 24, 2025, later refined by the Amendment Directions on January 19, 2026. These regulations ensure that banks channel credit toward sectors vital for inclusive growth, including Agriculture, MSMEs, Education, Housing, Renewable Energy, and Weaker Sections.

Core Framework and ANBC

A central feature of the 2025 Directions is the mandatory lending target linked to a bank’s Adjusted Net Bank Credit (ANBC). ANBC serves as a standardized base for calculating PSL obligations, representing a bank’s net credit exposure adjusted for specific off-balance sheet items and investments. This ensures a level playing field across different banking structures.

Key Lending Targets

The RBI employs a calibrated approach based on the bank’s category:

  • Domestic Scheduled Commercial Banks: 40% of ANBC.
  • Regional Rural Banks (RRBs): 75% of ANBC.
  • Small Finance Banks (SFBs): Revised to 60% (from 75%) by the 2026 Amendment.
  • Urban Co-operative Banks: 60% of ANBC.

The 2026 Amendment also clarifies the “grandfathering” of loans for NBFCs converting into SFBs. PSL classification applies only to the outstanding balance of transferred assets at conversion; any new loans generated post-conversion must meet SFB-specific PSL norms independently.

Expanding Reach and Integrity

A significant 2026 update includes bank lending to the National Cooperative Development Corporation (NCDC) for on-lending to cooperatives. This aligns with the “Sahakar Se Samriddhi” initiative, facilitating credit flow to grassroots cooperative societies for agriculture marketing and processing.

To prevent “double counting” of credit, the RBI has moved from internal due diligence to external auditor certification. For NCDC-related lending, quarterly certification from a CAG-empanelled firm is now mandatory, ensuring that PSL benefits are not claimed by multiple institutions.

The PSLC Framework

The Priority Sector Lending Certificate (PSLC) framework has been further formalized. PSLCs allow banks to transfer PSL fulfilment obligations without transferring the underlying credit risk. Key updates include:

  • Strict annual expiry of certificates on March 31.
  • Restrictions on SFBs from purchasing PSLCs for general arbitrage; they may only purchase them to meet specific sub-targets.

Technical Alignment

Finally, the 2026 Amendment harmonizes definitions for Off-Balance Sheet Exposures with RBI Capital Adequacy frameworks and updates district weightage to reflect new administrative boundaries. It also clarifies housing loan limits for rural areas not listed in the 2011 Census. Together, these directions reflect the RBI’s commitment to a precise, disciplined regulatory environment that balances commercial banking with national developmental goals.