Priority Sector Lending in Banking: Categories & PSL Percentage Targets

Priority Sector Lending (PSL) is a way to provide higher priority to certain economic sectors in the country. Priority Sector Lending aims to provide institutional credit to such sectors and segments for whom it is challenging to avail credit. In other words, the priority sector means those sectors that the GoI and RBI consider important for the development of the country's basic needs. These are to be given priority over other sectors. 

In the following article, we shall see more about Priority Sector Lending and its related aspects. Hence, the UPSC IAS aspirants are advised to read the below sections carefully to understand the topic better.

Download the UPSC Practice Questions on Priority Sector Lending for Prelims & Mains!

What is Priority Sector Lending?

Priority sector lending (PSL) is lending to those sectors of the economy which may not otherwise receive timely and adequate credit. This role is assigned by the RBI to the banks for providing a specified portion of the bank lending to a few specific sectors. This is essentially meant for an all-round development of the economy as opposed to focusing only on the financial sector.

Key Details Related to PSL in Banking for UPSC
Parameter	Details
PSL Full Form	Priority Sector Lending
Introduced by	Reserve Bank of India (RBI), formalized in 1972
Key Recommendation Committees	Narasimham Committee (1970s), Chakrabarty Committee (2012)
Legal Basis	Governed under RBI guidelines; not a statutory requirement
Applicable to	Scheduled Commercial Banks, RRBs, SFBs, UCBs, Foreign Banks (with conditions)
Total PSL Targets (as of 2025)	40% of ANBC or CEOBSE: Commercial & Foreign Banks (≥20 branches)
	75%: RRBs & SFBs
	60%: UCBs
Main Priority Sectors	Agriculture
	Micro, Small and Medium Enterprises (MSMEs)
	Export Credit
	Education
	Housing
	Social Infrastructure
	Renewable Energy
	Others (Weaker Sections, etc.)

History of Priority Sector Lending in Banking

• The priority sector started gaining popularity in 1972, right after the National Credit Council’s plea that commercial banks should give more emphasis to the priority sector.
• Initially, in 1974, the commercial banks were given a target of 33.33% of their total credit should be driven towards the priority sector.
• Following the recommendations of Dr K S Krishnaswamy Committee, this target was later revised to 40% of the total credit given by the banking institutions.
• The latest revision in private sector lending targets was made in 2012 by the M V Nair Committee.

The Reserve Bank of India (RBI) has classified the following eight categories of priority sectors in India:

• Agriculture
• Micro, Small and Medium Enterprises (MSMEs)
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others

Also, read the Difference Between NGOs and SHGs here.

Activities Covered Under Priority Sector Lending in India

The activities covered under priority sector lending typically include:

• Agriculture: Loans provided for farming activities, including crop cultivation, animal husbandry, fisheries, and other allied agricultural activities. 
• Micro, Small, and Medium Enterprises (MSMEs): Credit extended to micro, small, and medium enterprises. It includes loans for starting new businesses, working capital requirements, and expansion purposes. 
• Education: Loans granted for education-related expenses, including tuition fees, purchase of books, payment for educational courses, and other educational purposes. 
• Housing: Lending for housing finance, including loans for the purchase, construction, or renovation of residential properties. 
• Export Credit: Financing provided to exporters to facilitate international trade. It includes pre-shipment and post-shipment credit, export working capital, and other export-related financial services.
• Renewable Energy: Loans extended for renewable energy projects such as solar power, wind power, biomass, and other clean energy initiatives.
• Healthcare: Credit support for healthcare infrastructure development, including funding for hospitals, clinics, medical equipment, and healthcare services. 
• Social Infrastructure: Financing for social infrastructure projects such as schools, colleges, vocational training centers, and other community development initiatives.
• Loans to Weaker Sections: Special focus on providing credit to marginalized and economically weaker sections of society. It includes Scheduled Castes, Scheduled Tribes, and Other Backward Classes.

Also, read Mission Indradhanush for banks for UPSC here.

Weaker Sections under the Priority Sector Lending in India

The following categories of borrowers are classified as weaker sections under the priority sector in India:

• Small and marginal farmers: Farmers who own less than 2 hectares of land are classified as small farmers. Farmers who own less than 1 hectare of land are classified as marginal farmers.
• Artisans and village and cottage industries: Artisans and village and cottage industries are classified as weaker sections. This holds if their individual credit limits do not exceed Rs. 1 lakh.
• Beneficiaries under government-sponsored schemes: The beneficiaries under the below schemes are classified as weaker sections.
  • the National Rural Livelihoods Mission (NRLM), 
  • the National Urban Livelihoods Mission (NULM), and 
  • the Self Employment Scheme for Rehabilitation of Manual Scavengers (SRMS).
• Scheduled Castes and Scheduled Tribes: Scheduled Castes and Scheduled Tribes are two constitutionally recognized groups of socially and economically disadvantaged people.
• Beneficiaries of Differential Rate of Interest (DRI) scheme: The DRI scheme is a government scheme. It provides loans to weaker sections at a concessional interest rate.
• Self-help groups: Self-help groups are groups of women who come together to save money and provide loans to each other.
• Distressed farmers indebted to non-institutional lenders: For example, distressed farmers indebted to moneylenders. They are classified as weaker sections.

Also, check out the Ease 2.0 banking reforms index here.

The Reserve Bank of India (RBI) has recently issued revised guidelines for Priority Sector Lending (PSL), which came into effect from April 1, 2025. These new guidelines are crucial for banks operating in India.

• Enhanced Loan Limits: Several loan limits have been increased across various categories, including housing loans, education loans (up to ₹25 lakh), and social infrastructure loans (up to ₹8 crore per borrower).
• Renewable Energy: Loan limits for renewable energy projects have been increased (up to ₹35 crore for power generators/public utilities, and ₹10 lakh for individual households).
• Expanded "Weaker Sections" Category: This category has been broadened to include transgenders, along with other existing categories like small and marginal farmers, distressed farmers, artisans, SC/ST, persons with disabilities, and individual women beneficiaries (with the ₹2 lakh limit removed for UCBs).
• Differential Weightage: An incentive framework has been introduced where loans in districts with lower per capita credit flow will receive a higher weightage (125%) for PSL achievement, while those in districts with high credit flow will have a reduced weightage (90%).
• Focus on Start-ups: Loans up to ₹50 crore to Start-ups that conform to the MSME definition are now eligible for PSL.
• Factoring Transactions: Factoring transactions under the Trade Receivables Discounting System (TReDS) are now included in PSL.

Banks that fail to meet their PSL targets are required to contribute to various funds, such as the Rural Infrastructure Development Fund (RIDF) and other designated funds managed by NABARD, SIDBI, MUDRA, and NHB.

Priority Sector Lending Targets 

These new guidelines specify different Priority Sector Lending percentage targets for various categories of banks and within specific sectors. Here's a summary of the key PSL percentage targets:

Priority Sector Lending Targets
Bank Category	Total PSL Target	Key Sub-targets
Domestic Commercial Banks & Foreign Banks (with ≥ 20 branches)	40% of ANBC or CEOBSE	Agriculture: 18% (incl. 10% for Small & Marginal Farmers)
		Micro Enterprises: 7.5%
		Weaker Sections: 12%
Regional Rural Banks (RRBs) & Small Finance Banks (SFBs)	75% of ANBC or CEOBSE	Agriculture: 18% (incl. 10% for Small & Marginal Farmers)
		Micro Enterprises: 7.5%
		Weaker Sections: 15%
Urban Co-operative Banks (UCBs)	60% of ANBC or CEOBSE	Micro Enterprises: 7.5%
		Weaker Sections: 12%
		(No specific target for Agriculture)

Also, check out the Difference Between Primary, Secondary, and Tertiary Sectors here.

The goal of PSL is to make sure that important sectors like agriculture, small businesses, and weaker sections get access to loans. But there are some major difficulties in how PSL works on the ground:

• Many PSL areas like agriculture and small industries are risky. Crop failure, low profits, and no insurance make it hard for borrowers to repay loans. This increases bad loans (called NPAs) for banks.
• In remote and backward areas, there may not be enough businesses or job creators. So even if loans are available, people may not take them or use them well.
• Though farming gets the largest share of PSL, small and poor farmers often don’t have proper land records or collateral. Because of this, they can’t get loans from banks and are forced to borrow from moneylenders.
• Banks prefer to lend in cities or towns because it’s easier to check documents and recover loans. This creates inequality—rural areas get fewer loans.
• Sometimes, banks lend to large businesses that serve priority sectors (like big farm product companies). This helps banks meet targets but doesn’t directly help small farmers or businesses.
• Banks are more worried about meeting the 40% loan target than actually checking if the loan helps the borrower. This weakens the real goal of development.
• PSL rules are not always easy to follow. Banks may get confused about what counts as PSL. It’s also hard to track how the loan is being used—especially in small loans.
• RBI has added new PSL areas like start-ups, green energy, and exports. But banks are not fully ready to design the right loans or understand the risks in these new areas.

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