Credit flow to the farm sector is sought to be substantially enhanced
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RAO GN
The structure of the economy has been changing at an accelerated pace in recent years, making it necessary for Reserve Bank of India (RBI) to periodically revisit its Priority Sector Lending (PSL) mandates. These mandates direct commercial banks to compulsorily direct 40 per cent of their credit flow towards specific borrower segments identified as critical to the economy but underserved by lenders. The latest revisions to PSL norms, effective from April 1, 2025, may expand credit flow to affordable housing, renewables, some weaker sections and agriculture.
The most significant revision relates to an enhanced definition of what will constitute an affordable housing loan under PSL. Under the revised definition, housing loans of up to ₹50 lakh can now claim priority sector classification, compared to the ₹35 lakh limit that was in vogue earlier. PSL eligibility will be pegged to the location of the property. For centres with population greater than 10 lakh, bank loans of up to ₹45 lakh will get the PSL tag. For centres with over 50 lakh population, loans up to ₹50 lakh will qualify. This enhancement of loan limits was much needed, given the rising cost of home ownership in urban centres where there’s a dearth of affordable housing. PSL limits on loans extended for the repair of existing homes have also been scaled up to ₹10-15 lakh, from ₹6-10 lakh.
The expanding scope of PSL for non-conventional energy projects has been a key driver of credit flow to this sector. Now, monetary limits on loans towards solar and biomass power equipment and street lighting systems have been raised from ₹30 crore to ₹35 crore, on top of the doubling of this limit in the last four years. The ceiling on loans extended to weaker sections has been substantially lifted. Artisans and women borrowers will see an increase in their individual eligibility limits from ₹1 lakh to ₹2 lakh. Trans-genders and Joint Liability Groups will now be eligible for priority sector loans. Credit flow to the farm sector is sought to be substantially enhanced with individual and corporate farmers now eligible to tap into crop loans of up to ₹90 lakh and ₹4 crore respectively against hypothecation of produce, with loan limits for FPOs (Farmer Producer Organisations) set at ₹10 crore. While all this seems to be in order, the ceiling for educational loans, which has been enhanced from ₹20 lakh to ₹25 lakh seems quite inadequate.
Overall, the frequent tinkering with PSL norms suggests that it may be time for RBI to undertake a comprehensive review of the 40 per cent PSL mandate itself. It is concerning that five decades after its introduction, sectors such as agriculture or MSMEs still need the crutches of PSL to receive credit flow. In a capital-starved economy like India, there can never be enough quotas to meet the needs of all deserving sections. Apart from requiring micromanagement, PSL also promotes lazy banking. Some changes are in order.
Published on April 4, 2025
