CURRENT AFFAIRS
CURRENT AFFAIRS
Description
The Reserve Bank of India (RBI) has introduced a significant regulatory change by easing the Priority Sector Lending (PSL) requirements for Small Finance Banks (SFBs). This adjustment reduces the PSL obligation from 75% to 60% of a bank’s Adjusted Net Bank Credit (ANBC), aiming to give SFBs more flexibility in their lending strategies and enable them to better manage and diversify their loan portfolios.
Understanding Priority Sector Lending
PSL is a policy tool used by the RBI to direct credit to sectors that are considered critical for the economy but often face difficulty in accessing funds. These include agriculture, MSMEs, education, housing, and others. The intention is to ensure balanced economic development by mandating banks to allocate a certain portion of their credit to these priority sectors.
Key Changes In PSL Norms For SFBs
As per the new guidelines:
SFBs are now required to allocate 60% of their ANBC to priority sector loans, down from the earlier mandate of 75%.
Additionally, up to 20% of ANBC can be directed toward sectors where individual SFBs have specific expertise or advantages.
This recalibration is expected to unlock around Rupees 40,000 crore, which SFBs can now deploy into secured and lower-risk loan products such as vehicle loans, personal loans, and loans against property.
Impact On Lending Operations
The revised norms are expected to ease the burden on SFBs that were struggling to meet the strict PSL target. With greater operational flexibility, these banks can diversify their portfolios, reducing dependency on microfinance lending, which often carries higher risk. This move could improve asset quality and allow more robust risk management.
It may also encourage non-banking financial institutions (NBFCs) to consider transitioning into SFBs, seeing the benefits of a broader lending scope and regulatory flexibility.
Long-Term Prospects
In the coming 2–3 years, SFBs are likely to realign their growth strategies. With a more relaxed PSL framework, these banks could expand into new lending verticals, including automobile financing, personal credit, and investment-backed loans. Over time, this strategic shift is expected to support profitability, risk diversification, and financial stability.
Pathway To Becoming Universal Banks
Alongside PSL reforms, the RBI has outlined provisions for voluntary conversion of SFBs into universal banks. Of the 11 operational SFBs in India, three have already submitted applications for conversion. This step reflects the central bank’s broader vision of enabling SFBs to scale their operations and expand nationally, offering a wider array of banking services.
Boost From Priority Sector Lending Certificates
The updated guidelines also make Priority Sector Lending Certificates (PSLCs) more attractive. These certificates allow banks that exceed their PSL targets to sell the surplus to those falling short. For SFBs, especially those active in sectors like small and marginal farming, PSLCs could provide a new revenue-generating opportunity, while still supporting priority sector credit goals.
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