Priority sector lending (PSL) is an RBI requirement that banks direct a minimum share of their credit to sectors considered important for development but underserved by markets, such as agriculture, micro and small enterprises, education, housing, renewable energy and weaker sections. For domestic commercial banks the overall target is 40% of adjusted net bank credit.
Committees such as the M. V. Nair Committee (2012) and an RBI internal working group (2015) reviewed the framework, recommending changes such as including small and marginal farmers as a sub-target, introducing tradable certificates and focusing on weaker sections.
After bank nationalisation in 1969, the government wanted banks to serve farmers, small businesses and poorer regions rather than only large industry and trade. The concept of a "priority sector" was formalised in the early 1970s, and by 1980 banks were required to lend 40% of credit to these sectors. Over time, the list of eligible categories and sub-targets has been revised several times, most recently in 2020, to include areas such as renewable energy, start-ups and health infrastructure, and to give higher weight to districts with low credit flow.
PSL is a form of directed credit. Supporters see it as a necessary correction for market failures: banks tend to avoid small, rural and collateral-poor borrowers because they are costlier to serve and seen as risky. Critics argue that directed lending can lead to poor loan quality and distort bank decisions. This page explains how the framework works for a bank and how it is evolving, rather than describing individual credit schemes.
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