RBI Updates Priority Sector Lending Rules, Includes NCDC As New On-Lending Entity

The Reserve Bank of India (RBI) has released new directions regarding priority sector lending, modifying some provisions on targets, categorisation, and qualifying parties. The new directions have amended certain sections of the Master Directions on Priority Sector Lending, released in 2025. These revisions are effective from the date of publication of the notification.

According to RBI, the changes are intended to align the priority sector lending requirements with the regulatory revisions which have been separately notified. The directions also introduce a new eligible entity under the on-lending route and make changes to the references to existing directions. RBI has clarified certain provisions to facilitate a uniform interpretation and easy implementation of the directions by banks.

What Priority Sector Lending Covers

Priority Sector Lending, or PSL, is the practice by which the banks are mandated to lend a certain portion of their total lending to specified sectors of the economy. The sectors that are given priority are agriculture, micro and small enterprises, education, housing, renewable energy, and social infrastructure.

The banks are required to achieve the prescribed PSL targets in terms of the percentage of their adjusted net-bank credit or credit equivalent of off-balance sheet exposure. If the banks fail to achieve the prescribed targets, they are required to park their funds with identified institutions or invest in identified instruments as per RBI guidelines.

The PSL framework is also reviewed periodically to keep pace with changes in credit requirements, economic priorities, and regulatory frameworks.

NCDC Included Under On-Lending Route

One of the important changes brought about in the revised guidelines is the addition of the National Cooperative Development Corporation (NCDC) as a qualifying entity under the on-lending provisions of the PSL framework. This is, however, subject to certain conditions laid down by the RBI.

Banks can indirectly fulfil PSL objectives through on-lending by lending to intermediate institutions, which then extend credit to borrowers in priority sectors. Now that NCDC is eligible, banks can channel their funds through the corporation to support cooperative entities and activities related to agricultural and allied sectors.

NCDC operates with cooperative societies in various fields like agriculture, dairy, fisheries, handlooms, and rural development. The addition of NCDC increases the institutional avenues through which priority sector credit can be extended through cooperatives.

Compliance With Regulatory Instructions

According to the RBI, the new set of directions brings the PSL framework in line with regulatory directions issued in other sectors. Over a period of time, various regulatory measures can create inconsistencies if frameworks related to them are not aligned accordingly.

Through the updating of the PSL guidelines, RBI seeks to ensure that there is consistency in the regulations and that there is no ambiguity for the regulated entities.

Clarifications And Updated References

The new directions update references that are linked to existing instructions. As there are periodic changes in the regulatory guidelines in several circulars and notifications, some references might get outdated or overlap over time.

RBI has updated these references and clarified certain provisions where banks have faced implementation or interpretation challenges. The clarification aims to facilitate a uniform application of the norms of PSL.

What Banks Need To Do

Banks must examine the new guidelines and determine the effect of these guidelines on priority sector lending strategies and compliance. The addition of NCDC as a new eligible on-lending entity gives banks another opportunity to achieve PSL targets, within the terms and conditions set by the RBI.

Banks must also align their internal policies, processes, and reporting systems with the new set of directions.