Citi has termed the Reserve Bank of India’s (RBI) decision to ease priority sector lending (PSL) norms for Small Finance Banks (SFBs) as a structural relief, noting that the revised framework will support greater portfolio diversification and long-term business scalability.
Effective FY26, the PSL target for SFBs has been reduced to 60% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher. Under the revised structure, 40% of ANBC must still follow existing PSL norms, while the remaining 20% can be deployed in sub-sectors that offer more strategic advantage.
According to Citi, most SFBs reported priority advances exceeding 75% of their previous year’s lending, with the exception of Suryoday. A majority of these banks have historically leaned on the Microfinance (MFI) segment to comply with PSL obligations.
Citi believes the regulatory change now allows diversified SFBs to expand their non-PSL loan books, helping them enhance asset mix and profitability. The flexibility to allocate a portion of credit to non-PSL categories will aid in mitigating concentration risks, particularly in MFI-heavy portfolios.
The move is expected to strengthen portfolio quality and open up new growth avenues for better-capitalised and diversified SFBs.
Disclaimer: The views expressed in this article are based on brokerage reports and do not represent the views of this publication. Investors are advised to consult certified financial advisors before making any investment decisions.
