PSL norm easing provides limited room for SFBs to make gains: CareEdge

RBI cuts priority sector lending target for Small Finance Banks from 75 to 60 per cent starting FY26, easing compliance burden but offering limited short-term profit

The Reserve Bank of India’s move to ease priority sector lending (PSL) targets may free up around Rs 41,000 crore for Small Finance Banks (SFBs). However, these banks may have limited scope to realise short-term gains by offloading excess exposure due to the low premium for such certificates, according to CareEdge Ratings.

 

The banking regulator has reduced the overall PSL target for SFBs from 75 per cent to 60 per cent, effective from FY26, marking a significant shift in their lending obligations.

 

In a statement, CareEdge said the lower PSL requirement would create opportunities for SFBs to sell priority sector lending certificates (PSLCs) or offload excess exposure to other market participants. However, the immediate impact on profitability may be muted. 

 

The revised 60 per cent target is seen as more attainable. It reduces the regulatory burden, particularly during periods of rapid growth or economic stress, easing compliance pressures and lowering the risk of penalties for falling short of mandated lending.

 

Sanjay Agarwal, senior director at CareEdge Ratings, said the revised PSL guidelines represent a strategic inflexion point for Small Finance Banks.

 

“By reducing the overall PSL target while maintaining operational flexibility, the RBI has created a more balanced and practical regulatory framework,” he said.

 

The RBI’s easing of PSL norms for SFBs follows two recent regulatory developments in the priority sector space. First, in March 2025, the RBI expanded the range of exposures eligible for PSL classification. Second, in June 2025, it reduced the qualifying asset threshold for non-banking finance companies working as microfinance institutions (NBFC-MFIs) from 75 per cent to 60 per cent.