EAC-PM proposes social equity-led approach for priority sector lending

The EAC-PM has urged a review of India's priority sector lending norms, recommending a sharper focus on social equity and credit access for vulnerable groups

The Economic Advisory Council to the Prime Minister (EAC-PM) has called for a review of India’s priority sector lending (PSL) framework, recommending that mandatory lending targets be narrowed from economic to social equity.

 

The paper argued that PSL should focus primarily on improving credit access for small and marginal farmers, micro enterprises, and weaker sections instead of retaining wide sectoral classifications that have expanded over time.

 

“Given this economic inefficiency, the focus of PSAs should be changed from economic to social equity. Emphasis should be placed on its original goals of making credit available to SFs/MFs, small-scale industries, and weaker sections. Legacy inclusions in the definition of priority sector that are no longer relevant can be removed. Targets can be adjusted commensurately,” the paper said.

 

The council suggested that while sub-targets for small and marginal farmers and weaker sections should continue, broader targets such as overall agriculture lending could be reconsidered. It noted that the current agriculture classification also covers lending to large and corporate farming entities.

 

Similarly, it recommended retaining support for micro enterprises while reviewing the inclusion of other categories within the enterprise segment. According to the paper, reducing the number of mandatory categories could allow banks greater flexibility in deploying credit while preserving the social objective of financial inclusion.

 

Banks are currently required to allocate 40 per cent of their adjusted net bank credit to priority sectors under Reserve Bank of India norms. The framework covers sectors such as agriculture, micro and small enterprises, education, housing, exports, and renewable energy.

 

The paper said directed lending mandates can affect productivity if capital is diverted towards relatively less efficient uses. It also flagged concerns around the impact on banks’ profitability due to higher servicing costs and risks associated with mandated lending.

 

The study, based on district-level quarterly data between 2020 and 2025, found that the distribution of priority sector credit remains uneven across regions despite the regulatory targets.

 

At the same time, the council backed the use of priority sector lending certificates (PSLCs), saying the mechanism has helped banks manage compliance requirements more efficiently without significantly changing the regional flow of credit. PSLCs allow banks with excess lending under PSL categories to sell certificates to lenders that fall short of targets.