Banks priority sector lending models may need a rethink, says SBI report

With banks comfortably exceeding lending targets and PSLC trading surging, experts say the RBI may need to revisit the priority sector lending framework to better serve financial inclusion goals

The Reserve Bank of India (RBI) had devised the priority sector lending (PSL) mechanism in 1972 to ensure credit flow to underserving sectors, a framework that has been revised periodically.

 

It may once again be time for an overhaul, a recent report by SBI Research suggested. “Possibly, an opportune time has now come to assess future needs of financial inclusion and priority sector lending and make policy changes needed to ensure access to finance to weaker sections in line with Viksit Bharat objective,” the report, released on July 7, 2026, wrote. 

 

Since FY18, the banking sector has been fulfilling the 40 per cent PSL target. For FY26, the overall achievement was 45 per cent (provisional) as compared to 43.6 per cent in FY25. But at the same time, trading volume in priority sector lending certificates (PSLC) has also gone up to ₹12.2 trillion in FY25 from a mere ₹1.8 trillion in FY18. 

 

PSLCs are indirect instruments introduced by the RBI in 2016, and help mitigate bank profitability risks by allowing banks to trade the fulfilment of priority sector obligations at a market-determined rate without trading the underlying asset or risk.