RBI eases priority lending norms for SFBs, unlocks Rs 41,000 cr for low-risk sectors
The number equals about 15% of advances of small finance banks' balance sheets as on March 31, 2025, according to estimates by CareEdge. 'The ability to redeploy this capital into higher-yielding or lower-risk segments such as secured retail, MSME, or housing finance offers significant upside for SFBs,' the rating agency said in a report Tuesday.
The report added that the regulatory shift comes at a time when the gross non-performing Assets (GNPA) for small finance banks increased to 4.35% as of March 31, 2025, compared to 3.50% a year earlier. The rise was primarily driven by SFBs with a higher concentration in microfinance lending. 'In this context, the revised norms offer relief, allowing SFBs to rebalance their portfolios, mitigate concentration risk, and chart a more sustainable growth path.'CARE also said that a lower PSL requirement would create opportunities for SFBs to sell Priority Sector Lending Certificates (PSLCs) or offload excess PSL exposure to other market participants. However, since the PSLC premium is currently low, this change's immediate impact on profitability may be limited in the short term.According to Kotak Institutional Equities, the central bank's relaxation does not solve the PSL compliance challenge for the small and marginal farmers (SMF) sub-sector, where the requirement stays unchanged at 10% of ANBC.
This sub-segment is the most attractive with PSLC commissions in the range of 1.5-2.0% historically. 'In the near term, the relaxation will likely free up additional PSL in other subsectors (where PSLC commissions are much lower) for SFBs to earn modestly higher commissions until the share of PSL assets is in surplus,' the brokerage house said.The banking regulator on Friday lowered SFBs'' priority sector lending target to 60% of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposures (CEOBE), whichever is higher, from 75% earlier. The SFB shall continue to allocate 40% of ANBC or CEOBE to different sub-sectors under the priority sector, while the balance 20% can be allocated to any one or more sub-sectors where the bank has a competitive advantage.
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