Statsguru: Skewed priorities in priority sector lending across districts

A report by the Economic Advisory Council to the Prime Minister has flagged sharp regional imbalances in priority sector lending and called for a more equity-focused PSL framework

The Economic Advisory Council to the Prime Minister has called for a revamp of the priority sector lending (PSL) framework, shifting focus from economic efficiency to social equity. Between 2020 and 2025, just 63 districts — 7.88 per cent of the total — accounted for 45.78 per cent of all priority sector credit, with outstanding advances in these districts totalling Rs 2.25 trillion.

 

State capitals and major industrial centres capture the lion’s share of priority sector lending, the report finds. The Himalayan states, the North-east, eastern Uttar Pradesh, Bihar, Jharkhand, Odisha, and parts of Madhya Pradesh and Rajasthan remain systematically underserved.

 

Since 1980, the 40 per cent PSL target for scheduled commercial banks has remained unchanged. The 2025 revision lowered the target for small finance banks and urban co-operative banks to 60 per cent from 75 per cent (Chart 1). 

 

Among all sectors, the skew is sharpest in micro, small and medium enterprise lending, with just 11.5 per cent of districts cornering 67 per cent of flows (Chart 2). 

 

Micro and small enterprises overtook agriculture in PSL share for the first time in FY26. However, housing and education loans have decreased by 15 per cent and 48 per cent, respectively, over the past seven years (Chart 3). 

 

Private sector banks have led on PSL targets since overtaking public sector banks in FY22 (Chart 4). 

 

Gross non-performing assets from PSL more than doubled between FY16 and FY25 (Chart 5). 

 

The State Bank of India (SBI) and private banks hold the highest outstanding deposits in the Rural Infrastructure Development Fund. On Priority Sector Lending Certificates (PSLCs), SBI is a net buyer, while small finance banks and nationalised banks are net sellers (Chart 6).