RBI Revises PSL Rules To Encourage Direct Lending, Strengthen Accountability

New Delhi, Jan 28 (KNN) The Reserve Bank of India’s recent revisions to priority sector lending (PSL) norms aim to push banks toward direct lending and stronger borrower-level accountability, reducing reliance on indirect channels like NBFC on-lending, according to industry experts.

Amitava Chatterjee, MD & CEO of Jammu & Kashmir Bank, noted, “The idea behind these changes is that banks should do PSL themselves and not rely on NBFCs. A bank should directly be involved in priority sector lending.” 

On January 19, the RBI revised the PSL framework to reflect regulatory changes, include lending to the National Cooperative Development Corporation under PSL, and clarify existing provisions, reported TOI.

PSL Targets Remain, Focus on Execution

PSL targets remain at 40 percent of adjusted net bank credit (ANBC), but revised rules focus on how banks meet them. As of March 31, PSL stood at 43.1 percent of ANBC, with public banks contributing 36 percent and private banks, at 44.3 percent of ANBC, accounting for 27.1 percent of the total.

The PSL book exceeds Rs 65 lakh crore, including Rs 31.3 lakh crore for MSMEs and around Rs 35 lakh crore for affordable housing.

Shift Towards Direct Lending and Co-Lending

Banks currently meet PSL targets through direct lending, co-lending and securitisation with NBFCs, on-lending to intermediaries, and purchasing PSL certificates (PSLCs).

Direct lending, co-lending, and securitisation have no limits, while on-lending is capped at 5 percent of PSL, encouraging banks to prioritise direct lending, said Kushal Rastogi, CEO of Knight Fintech.

A key change is the mandatory external auditor certification to prevent loan misclassification and double counting. Sachin Sachdeva of ICRA said that the regulator wants greater assurance that misclassification, including multiple loans to the same borrower, does not continue.

Supervisory Reviews

Following supervisory reviews, banks such as ICICI, HDFC, and Axis set aside significant provisions, Rs 1,283 crore, Rs 500 crore, and Rs 1,231 crore respectively, for misclassified agricultural loans.

The revised framework reflects the RBI’s push for cleaner, more accountable PSL practices and greater direct lending to priority sectors.

(KNN Bureau)