A report by State Bank of India (SBI) has proposed that all infrastructure loans be accorded priority sector status to boost investment in the sector. Alternatively, the report suggested exempting such loans from the calculation of adjusted net bank credit (ANBC) used for priority sector lending (PSL) purposes.
Key Highlights
- SBI proposes priority sector status for infrastructure loans to boost investment toward Vision 2047.
- Organic PSL fell to 34.4% of ANBC in FY25, masked by reliance on PSLCs and RIDF.
Under current Reserve Bank of India (RBI) norms, banks must lend 40% of ANBC to the priority sector. "We need huge investments in infrastructure to achieve the Prime Minister's Vision 2047. Long-term resources available for the same are limited in the absence of a vibrant bond market," the report said, adding that infrastructure funding undertaken by banks from their own resources currently isn't allowed to be classified under PSL.
Key Recommendations: Higher Limits Across Categories
The report recommended an upward revision in loan limits across several PSL categories, including housing, education, renewable energy, social infrastructure, and bank lending to non-banking financial companies (NBFCs) for on-lending. Specific proposals include:
- Raising the PSL limit for renewable energy projects to Rs 100 crore from Rs 35 crore
- Increasing the home loan eligibility ceiling to Rs 1 crore in metro centres and Rs 75 lakh elsewhere
- Doubling the education loan limit eligible for PSL classification to Rs 50 lakh from Rs 25 lakh
- Raising the social infrastructure loan limit to Rs 25 crore
- Enhancing the per-borrower cap on bank loans to NBFCs for on-lending to Rs 25 lakh for agriculture and Rs 50 lakh for other sectors
SBI noted that the existing PSL framework, introduced by the RBI in 1972 to improve credit access for underserved sectors, has largely succeeded in helping banks meet the mandatory lending target. However, it argued the framework now needs recalibration to accommodate emerging financing needs tied to infrastructure development, the energy transition, and sustainable growth.
Headline PSL Numbers Mask Underlying Weakness
The report observed that banks have consistently met the 40% PSL target since FY18, with overall PSL estimated at 45% of ANBC in FY26, up from 43.6% in FY25. Trading volumes in PSL certificates (PSLCs) have also surged, rising to Rs 12.2 trillion in FY25 from Rs 1.8 trillion in FY18.
However, State Bank of India cautioned that this headline achievement masks a growing reliance on inorganic avenues such as PSLCs and the Rural Infrastructure Development Fund (RIDF). Excluding these components, banks have actually been unable to meet the 40% target organically, with organic PSL falling to 34.4% of ANBC in FY25.
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Reforms Sought for RIDF Framework
The report also called for reforms to the RIDF framework, including exempting RIDF deposits from risk-weight and capital adequacy calculations and rationalizing penal charges. It argued that banks currently find it more profitable to purchase PSLCs than to invest in the RIDF - a dynamic the proposed reforms aim to correct.
