RBI Proposes Major Priority Sector Lending Overhaul Expanding Loan Caps to Rs 100 Crore
The Reserve Bank of India (RBI) has issued the draft Reserve Bank of India (Commercial Banks – Priority Sector Lending – Targets and Classification) Directions, 2026, proposing a significant overhaul of priority sector lending (PSL) rules. While leaving the headline lending target unchanged, the central bank has proposed raising loan thresholds across multiple sub-sectors, creating broad on-balance-sheet lending opportunities that could sharply reduce commercial banks' dependence on Priority Sector Lending Certificates (PSLCs).
Under current mandates, domestic commercial banks must allocate 40% of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBSE), whichever is higher, to priority sectors. The draft retains this overall 40% target, as well as the sub-targets of 18% for agriculture and 7.5% for micro-enterprises.
Expanded Direct Lending Limits
To help banks achieve compliance through direct asset origination rather than secondary market adjustments, the RBI has proposed substantial revisions to sector-specific limits:
- Agriculture Infrastructure & Food Processing: Loans of up to ₹100 crore per borrower will qualify under PSL, up from much tighter legacy ceilings.
- Corporate Farmers & FPOs: Loans to corporate farmers, Farmer Producer Organisations (FPOs), partnership firms, and cooperatives for designated agricultural activities will qualify up to an aggregate cap of ₹4 crore per borrower.
- Renewable Energy: Projects for renewable power generation and public utilities will be eligible for PSL classification for credit up to ₹35 crore per borrower, while individual household limits are set at ₹10 lakh.
- Social Infrastructure & Healthcare: Loans up to ₹8 crore per borrower for schools, drinking water, and sanitation facilities will qualify, while healthcare facilities set up in Tier-2 to Tier-6 centres will be eligible for up to ₹12 crore per borrower.
- Education Finance: Individual education loans of up to ₹25 lakh, including vocational courses, will fall under priority classification.
Relief from Costly PSLC Premiums
In previous fiscal cycles, lenders with structural shortfalls in sub-segments such as small and marginal farmers or non-corporate agriculture were forced to bridge the gap by purchasing PSLCs via the RBI's e-Kuber portal or parking funds in low-yielding Rural Infrastructure Development Fund (RIDF) deposits. PSLC trading, executed in standard lots of ₹25 lakh without transferring credit risk or loan assets, regularly traded at steep premiums, directly eroding net interest margins for private and foreign lenders.
By opening up high-ticket credit avenues—most notably the ₹100 crore window for agro-processing units, cold chains, and storage infrastructure—commercial banks can more easily generate qualified assets organically. This structural broadening is expected to soften PSLC market demand and premium costs.
Guardrails on Intermediary On-Lending
The draft directions also establish stricter guardrails on indirect lending. The RBI has proposed an overall cap of 5% of a bank's average PSL achievement over the preceding fiscal year's four quarters on bank loans extended to non-banking financial companies (NBFCs), housing finance companies (HFCs), and the National Cooperative Development Corporation (NCDC) for on-lending. This cap will not apply to NBFC-MFIs and microfinance institutions registered with recognized self-regulatory organisations, preserving credit delivery to bottom-of-the-pyramid borrowers.
Compliance will be tracked strictly on a calendar-quarter basis. Once finalized following stakeholder feedback, the updated framework will immediately supersede prior classification guidelines, giving Indian banks a clearer roadmap to blend developmental lending mandates with commercial underwriting.
