The Reserve Bank of India’s move to revise priority sector lending (PSL) norms for Small Finance Banks (SFBs) has been welcomed as a key structural reform by global brokerage Morgan Stanley, which believes the change will enhance long-term growth flexibility for these lenders.
Effective from FY26, the RBI has reduced the PSL target for SFBs to 60% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher. This marks a reduction from the current higher threshold and is aimed at offering these banks greater operational and portfolio flexibility.
Morgan Stanley noted that this revised PSL requirement is a “structural positive” as it provides more room for SFBs to diversify beyond the constrained PSL-driven portfolios, which currently limit strategic asset allocation.
The brokerage said the move is likely to boost long-term growth potential by allowing SFBs to allocate a larger share of their credit to higher-yielding or diversified segments, rather than being strictly bound by PSL rules.
While SFBs have historically met PSL norms through heavy exposure to microfinance and other targeted sectors, the relaxation provides greater room for broad-based expansion, which could benefit overall portfolio quality and return metrics over time.
Disclaimer: The views expressed in this article are based on brokerage reports and do not represent the views of this publication. Investors should consult certified financial advisors before making investment decisions.
