It’s a known fact that the MSME sector in India has been responsible for over 45% of the nation’s exports representing 30% of the country’s GDP. Similarly, the agriculture sector has been known to contribute up to 15% to the country’s total GDP. Still, crucial sectors like them suffer from lack of access to financial resources. Hence, the Reserve Bank of India launched the Priority Sector Lending (PSL) Scheme to enable credit supply across industries suffering from financial challenges.
Priority Sector Lending-Meaning and Purpose
Priority sectors of an economy are those business industries which are vital to the economic development of a country and need to be prioritized over others. These industries form the core basis of every economy; thus, governments encourage financial institutions to support their growth and expansion through adequate financial support. Thus when priority sectors get an impetus in credit facilities it is termed as priory sector lending.
Therefore, priority sector lending is an obligation imposed by the Reserve Bank of India on banks to offer a certain percentage of their total lending commitments to notified business industries that are unlikely to receive timely and adequate funding. Apart from this, the RBI also sets priority sector lending targets expressed as a percentage of a bank’s Credit Equivalent Amount or Adjusted Net Bank Credit (ANBC). The RBI also oversees priority sector lending compliances by banks and other financial institutions through quarterly performance review.
Also, the RBI also issues master guidelines, classifications and regulations with reference to Priority Sector Lending. These guidelines promote comprehensive economic growth while focusing on the immediate growth objectives of a nation.
Know how SMEs can avail PSL benefits
Which are the priority sectors specified by the RBI in India?
As per the current Master Directions issued by RBI in 2025, the Reserve Bank of India updated the priority sector lending regulations and guidelines. The latest review has also extended focus on Sustainable Development Goals and environmentally friendly policies. Some of the industries that have been notified by the RBI including –
Agriculture
- The agricultural industry has been critical for the growth of the Indian economy. Priority sector lending to the agro industry in India encompasses loans for agriculture and allied activities (i.e. farm and crop loans).
- Such loans are either approved to the individual farmers or through institutions such as Self-Help & Joint Liability groups.
- Farmers cultivating their crops, raising livestock, cultivating crops for horticulture, bee farming, raising sericulture, as well as marginal farmers and distressed farmers who owe funds to private lenders, and those functioning on build agricultural infrastructure and install grid connected agro pumps are eligible to avail priority sector lending loans.
- The revised RBI guidelines specify that all the banks (including foreign and rural banks) shall mandatorily devote higher out of 18% of either Credit Equivalent Amount or Adjusted Net Bank Credit (ANBC) for priority sector lending.
Micro, Small and Medium Enterprises (MSME)
Micro |
Small |
Medium |
|
| Definition | Turnover lesser than Rs. Five crores.
Investment in Plant, Machinery and Equipment should not be higher than Rs. One crore. |
Turnover lesser than Rs. Fifty crores.
Investment in Plant, Machinery, Equipment than Rs. Ten crores. |
The budget does not exceed Rs. Fifty crores for Plant/Machinery/Equipment.
Revenue of not more than Rs. Two Hundred and Fifty crores. |
| Permissible Loan Limits | Micro Businesses shall be allowed to avail loans up to
Rs. Five crores. |
Small Businesses shall be allowed to avail loans up to a limit of Rs. Five crores. | Medium sized businesses shall be eligible to avail loans up to Rs. Ten crores. |
| SMEs recognized as Start-ups shall be eligible to avail sector loans up to a limit of Rs. Fifty crores. | |||
MSMEs qualified for priority sector lending benefits
| Manufacturing Businesses | Micro, Small, and Medium-Sized Businesses engaged in manufacture of goods in any industry listed under Sch-I of Industries Regulation Act 1951. |
| Service Based Businesses | Micro and Small businesses can borrow up to a sum of Rs. Five crores for every business unit.
Medium businesses offering services could borrow funds up to Rs. Ten crores. |
| Khadi and Village Industries | Loans to businesses engaged under these industries could be classified under the 7.5% sub-targets for micro businesses under priority sector lending. |
Export Credit
- Credit facilities extended to agriculture and other microbusinesses are included under the Priority Lending sector.
- Urban Cooperative Banks, Small Finance Banks, Regional Rural Banks, Domestic and International Banks shall contribute at least 2% of their ANBC (Adjusted Net Bank Credit) and CEOBE (Credit Equivalent of Off-Balance Sheet Exposure) whichever is higher.
Education Sector
- Loans offered to individuals post-secondary education including vocational training for up to a sum of Rs. 20L have been recognized as priority lending industry.
- Loan facilities are available for nationwide as well as global education institutions.
- Loans designated under this category shall be considered priority lending till its maturity.
Housing Sector
- Housing loan facilities extended to individuals have been regarded as a Priority Sector by the RBI.
- Individual housing loans up to Rs. 35L for purchase or construction of homes in urban areas, whereas a limit of Rs.25L is applicable for house purchase or construction in non-urban areas.
- Overall costs of construction/house purchase shall not exceed Rs. 45L in urban areas and Rs. 30L in other cities.
- Loans up to the total cost of a dwelling unit could cover repairs up to Rs. 10L in urban cities as well as Rs. 6L in non-urban areas.
- Housing loans offered to bank personnel shall not be included under priority lending guidelines.
Social Infrastructure
- The RBI priority sector lending guidelines 2025 have recognized the need for grass-root development of social infrastructure for the nation’s development.
- The priority sector lending guidelines specify loans up to a sum of Rs. 5cr. for different objectives such as development of education, health and sanitation infrastructure.
- Loans shall be available for upgradation of water level in houses or building/renovation of toilets.
- Loans shall be available for construction and development of medical facilities in Tier 2 to Tier 6 with maximum limit of up to Rs. 10L per borrower.
- Depending on certain conditions, banks’ lending to micro finance institutions for lending to individuals or members of self- help groups or Joint Liability Groups, etc. for water and sanitation shall be eligible for such loans.
Renewable Energy
- Recent priority sector lending guidelines 2025 lays a strong emphasis on adoption of eco-friendly policies and accomplishing Sustainable energy goals.
- Loans up to the limit of Rs. 30 crores shall be available for construction of windmills, hydel plans, biomass plants and solar based generators.
- Loans shall be available for development of public infrastructure running on renewable energy i.e. electrification of remote villages as well as installation of street lighting structures.
- Every individual shall be eligible to avail loan facilities for construction of renewable energy infrastructure for a maximum limit of Rs. 10L.
Others
- Individuals or those individuals’ members of Self-Help groups or Joint Liability Groups meeting specific income related requirements shall be eligible for loans up to Rs.1L.
- Self Help Groups shall be eligible to avail funds for objectives other than meeting agriculture or SME business needs. Such purposes include-meeting social obligations, construction or renovation of homes, installation of sanitary facilities, etc.
- Loans up to a sum of Rs. 1L per borrower to financially distressed individuals to pay off debts to non-institutional lenders.
Advantages of Priority Sector Lending
Promotes Inclusive Growth-
Priority Sector Lending is essential for fostering inclusive growth ensuring credit access to the underserved and economically disadvantaged segments of society. Banks help to promote economic development and lessen inequality among various population groups by allocating capital to priority sectors.
Supporting Crucial Industries-
Priority sector lending provides assistance to industries including agriculture, SME industries, and rural development that are essential to the expansion and economic stability. Banks support these industries financially helping to increase output, job creation, and promote general economic prosperity.
Managing regulatory requirements-
Regulators, such as the RBI, require banks to distribute a specific percentage of their overall lending to priority sectors. Banks must comply with priority sector lending objectives as required by law to guarantee credit access to industries who need attention and support.
Relaxed Eligibility Criteria-
Priority sector lending loans come with relaxed eligibility requirements enabling easier credit access to the borrowers. Borrowers with minimal incomes or with inadequate creditworthiness find it easy to qualify the same.
Loans available at cheaper rates of interest-
Loans granted to priority sector lending industries come with cheaper interest rates making borrowing funds an affordable means to fulfil their business requirements.
Challenges of Priority Sector Lending
Growing Non-Performing Assets (NPAs) for banks-
The complexity of loan repayment in priority industries might lead to rise in Non-Performing Assets. As per a 2024 RBI bulletin, more than 35% of the priority sector lending linked debts to marginal and small-scale farmers are in default or past due. In contrast to quota fulfilment, it raises concerns regarding quality of credit support.
Banks under pressure for Compliance-
It is to be noted that compliance-based lending has surpassed impact-based lending impending genuine financial deepening. Striking a balance between necessary loan allocation and profitability can be difficult for banks.
Regional and Institutional Credit Gaps-
According to RBI data, there appears to be a notable disparity in credit distribution between states. Further, the capacity and compliance challenges faced by cooperative banks and regional rural banks are further challenging implementation of priority sector lending schemes at grass root level.
Urban Bias of priority sector lending Flows-
Generally, banks lay more emphasis on serving urban and semi -urban SME s over rural beneficiaries that undermines the purpose of priority sector lending.
RBI’s revised guidelines for Priority Sector Lending
The RBI has introduced revised priority sector lending guidelines effective from April 1, 2025. These measures aim to expand lending availability to key segments of the economy resulting in increased financial inclusion. Some of the major changes introduced by the recent amendments include-
Key Changes in the New RBI Guidelines for Priority Sector Lending
Higher Loan Limits for Housing and Renewable Energy
Increased loan ceilings for loans for priority sectors is one of the major amendments under priority sector lending guidelines. For instance, housing loan limits have been enhanced to offer more financial access to consumers particularly dwelling in urban and semi-urban areas. Furthermore, in an effort to promote renewable energy investments the RBI has expanded purposes under which loans could be categorized as Renewable Energy.
Revised Targets for Urban Cooperative Banks
The RBI has amended priority sector lending commitments for Urban Cooperative banks. Thus, from April 1, 2025 the urban cooperative banks shall be required to commit higher of 60% of the bank’s Credit Equivalent Amount or 60% of Adjusted Net Bank Credit (ANBC). Such changes shall improve cooperative bank’s ability to assist priority industries guaranteeing credit flows where they are most required.
Expanded Definition of Weaker Sections
Under the weaker and vulnerable category, the updated framework also broadens the pool of qualified borrowers. Notably, the previous cap on loans made by UCBs to specific female recipients has been lifted. It is anticipated that this modification will increase financial inclusion by facilitating credit availability for women entrepreneurs and economically underprivileged populations.
Lets us quickly take a look at the classification of weaker section under the priority sector lending in India:
- Small and Distressed Farmers
- Home and Cottage Industry
- Craftsmen and Artisans
- Self Help Groups
- Beneficiaries of Differential Rate of Interest (DRI) scheme and/or government-sponsored schemes
- Members of Scheduled Caste and Scheduled Tribes (SC/ST)
Understanding the Priority Sector Targets
Depending on their financial situation, banks fall into different priority sector lending target categories. These goals are intended to make sure that financial institutions continue to support national development agendas while upholding a sustainable lending strategy. The category includes-
- priority sector lending shall receive 40% of the ANBC and CEOBSE from domestic commercial banks and foreign banks with more than twenty branches.
- Small Finance Banks and Regional Rural Banks shall aim to channel 75% or more of credit flow towards small scale businesses and rural businesses.
- Urban Cooperative Banks have distinct goals that are based on their operating scope and scale.
Farmers and Producer Organizations
- Farmer Producer Organizations (FPOs) engaged in farming with assured product marketing shall enjoy higher credit limits at a predetermined cost.
- Farmers holding less than one hectare land shall be known as Marginal Farmers as well as farmers holding more than one hectare but lesser than two-hectare land shall be referred to as Small Farmers.
- Loans for farming purposes shall be restricted to a ceiling of Rs. 2 crores.
Addressing Regional Credit Disparities
The RBI has put in place a differential weight mechanism to ensure easier credit access to reach underserved and neglected areas. The revised priority sector lending guidelines strives to address regional indifferences through the following steps-
- Districts are assigned ratings on the basis of their per capita credit flow. Accordingly, districts with higher per capita credit flow will be given a lower credit weight of 90%, districts with fewer credit per capita will be afforded 125% weight by banks.
- Districts with lower credit weights shall be offered incentives whereas districts with higher credit weight will be discouraged.
Final Thought
Hence, Priority Sector Lending is a crucial stride towards guaranteeing even distribution of credit to industries who need it the most. Particularly for individuals such as farmers and share crop growers who earlier relied heavily on non-formal credit for financial support. Furthermore, it encouraged entrepreneurship among vulnerable economic sections and boosted growth of the SME industry.
With new guidelines in place, the RBI aims to achieve equitable growth through expansion of loan limits, broadening the pool of qualified borrowers, and promotion of green investments. This move shall not only boost employment generation but also promote inclusive growth ensuring credit flow is more evenly distributed across various facets of society.
The revised Priority Sector Lending guidelines have further added features such as improvements such as expansion of renewable energy classifications, higher loan ceilings, better assistance to women and underprivileged groups, etc. which will go a long way to achieve inclusive growth and advance the Indian economy as a whole. To manage your credit and loans at one place you may contact BankKeeping who can help you reduce your borrowing costs immensely and help avail better credit at favorable terms.
FAQs
Does a Startup qualify for Priority Sector Lending?
Yes, If a SME/MSME startup falls under the Priority sectors as identified by the PSL scheme it can avail the facility of priority sector lending.
Do Foreign banks follow the Priority Sector Lending Guidelines?
Yes, but they have dissimilar obligations as compared to domestic banks and large foreign banks (those having more than 20 branches).
What is the maximum credit amount for SME and MSMEs under PSL?
Micro and Small Enterprises – Upto ₹ 5 crore
Medium Businesses – Upto ₹ 10 crore
Startups falling under MSMEs – Upto ₹ 50 crore