Source: BS
Context: The Reserve Bank of India (RBI) has reduced the Priority Sector Lending (PSL) target for Small Finance Banks (SFBs) from 75% to 60% to enhance lending flexibility and profitability.
About RBI has reduced the Priority Sector Lending target for Small Finance Banks:
- What it is?
- RBI’s revised PSL norms aim to ease lending restrictions for SFBs, allowing them to diversify and improve asset quality.
- Old PSL Criteria: SFBs were mandated to allocate 75% of their Adjusted Net Bank Credit (ANBC) to PSL, which led to challenges in sourcing quality borrowers and lower margins.
- New PSL Criteria:
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- Overall PSL target reduced from 75% to 60%.
- The additional PSL component reduced from 35% to 20%.
- SFBs still required to maintain 40% ANBC towards specific PSL sub-sectors.
About Small Finance Banks (SFBs):
- What it is?
- SFBs are differentiated banks, providing banking services to underserved and unbanked segments of the population.
- Established in: Concept introduced by RBI based on Nachiket Mor Committee 2013 recommendations; licensed under Banking Regulation Act, 1949.
- Objective:
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- Expand financial inclusion by serving small and marginal farmers, MSMEs, and informal sector entities.
- Provide basic banking services to rural and semi-urban populations.
- Serve as an alternative banking institution for credit-deprived sectors.
- Features:
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- Can accept all deposit types.
- Can provide small-ticket loans with a localised operational model.
- Can distribute non-risk-sharing financial products (mutual funds, pensions, insurance).
- 25% of branches mandated in rural areas.
- 50% of loan portfolio to MSME sector.
- Minimum net worth ₹100 crore at launch, to be raised to ₹200 crore within 5 years.
- Required to maintain 15% Capital Adequacy Ratio (CAR) on risk-weighted assets.
