PSBs propose 2% sub-target for climate finance under PSL framework

Public sector banks also seek higher lending limits for renewable energy projects and inclusion of electric vehicle financing under the priority sector lending framework

Public sector banks (PSBs) have proposed carving out a 2 per cent sub-target for climate and transition finance within the existing priority sector lending (PSL) requirement of 40 per cent of adjusted net bank credit (ANBC) for scheduled commercial banks. They have also sought higher lending limits for loans to the renewable energy sector under PSL and inclusion of electric vehicle financing within this framework.

 

The lenders presented the proposals to Finance Minister Nirmala Sitharaman at the two-day brainstorming session — PSB Confluence — organised by the Department of Financial Services (DFS), which ended on Tuesday.

 

Currently, there is no separate climate or transition sub-target under PSL. The sub-targets under the 40 per cent of ANBC target, as per the PSL framework, entail agriculture loans (18 per cent); micro enterprises (7.5 per cent); weaker sections such as Scheduled Castes (SCs), Scheduled Tribes (STs), minority communities and self-help groups (12 per cent); and the residual for other eligible sectors, including housing, education, renewable energy, social infrastructure and export credit.

 

Meanwhile, experts flag the need for a climate finance taxonomy in India as a key requirement for the introduction of a climate or transition sub-target under PSL. “Having a sub-target on climate and transition finance under PSL would definitely help; it would catalyse the market and help towards India’s net-zero carbon emission aim. But what constitutes transition finance is still a draft guideline in India. This needs to be finalised. It also has potential to attract global asset managers to Indian markets,” said Ajay Sirikonda, leader — financial services risk consulting, EY India.

 

The finance ministry’s Department of Economic Affairs (DEA) had released a draft framework on climate finance taxonomy last year and had also invited public comments till June 2025 after Sitharaman announced the taxonomy in the Budget for 2024-25 (FY25). However, the framework has not yet been finalised. An email sent to the finance ministry seeking an update on the final framework for climate finance taxonomy did not elicit an immediate response.

 

Moreover, banks would need to ramp up their expertise in transition finance before it is mandated under PSL.

 

“Transition finance is a specialised area of lending, which includes financing for high-carbon-emitting industries such as iron and steel, chemicals and fertilisers, and construction. Assessing such loans requires banks to have a strong understanding of the relevant technologies, emissions-reduction pathways and industry standards. Many banks would therefore need to build expertise and undergo training before implementing such a sub-target,” said Kuntal Sur, partner — financial services and treasury advisory, PwC India.

 

PSBs have also proposed raising the limit to Rs 75 crore for wind and small hydropower projects, but retaining the existing Rs 35 crore limit for solar photovoltaic projects, with the overall ceiling remaining at Rs 100 crore per borrower from the banking system. Under renewable energy financing, which includes lending for solar photovoltaic, wind and small hydro projects, the loan exposure limit to a single borrower is Rs 35 crore.

 

The banks have proposed PSL treatment for loans of up to Rs 2 lakh for electric two-wheelers and Rs 20 lakh for electric four-wheelers for personal use. They have also proposed PSL treatment of loans up to a Rs 25 lakh limit for battery-swapping and charging infrastructure, and up to a Rs 50 crore limit for commercial fleet operators.