While big segments of economy agriculture, MSMEs and other elements of India Inc do benefit from the framework, a study by the Reserve Bank of India (RBI) has shown that PSL helps in improving overall asset quality of banks too.
Sitharaman’s Budget 2025 offers an opportunity to address these concerns by fostering innovation and sustainability through targeted financial interventions.
What is priority sector lending
Introduced by the Reserve Bank of India (RBI), the PSL policy mandates banks to allocate a certain proportion of their loans to critical sectors such as agriculture, education, housing, and small industries, ensuring equitable credit distribution.
Also Read: Budget 2025: States to get more funds for disaster relief via interest-free loan scheme Over the years, this has been instrumental in driving socio-economic growth, particularly in underserved areas. PSL has maintained a consistent share above 40% across banks, reflecting its importance in driving socio-economic development. Despite initial concerns about higher non-performing assets (NPAs) in PSL compared to non-priority loans, the trend reversed post-2015, thanks to improved NPA recognition following the asset quality review.However, as India transitions to an innovation-led economy, the PSL framework needs a transformative overhaul. Agriculture, for instance, once accounted for over 30% of GDP in the 1990s but now contributes only 14%. Despite this shift, its PSL allocation remains unchanged at 18%.
Meanwhile, sectors with higher growth potential—such as green energy, digital infrastructure, and innovative manufacturing—receive insufficient attention.
Budget 2025: What the CII is suggesting
Periodic Review of PSL Norms
The CII has recommended that the PSL framework undergo periodic reviews every 3-4 years to ensure that credit allocations are in sync with evolving economic priorities and sectoral growth dynamics.
Inclusion of Emerging and High-Impact Sectors
The CII has strongly advocated for broadening PSL priorities to include emerging and high-impact sectors that align with India’s long-term growth ambitions. For instance, green initiatives such as renewable energy projects, electric vehicles (EVs), and climate-resilient agriculture can drive sustainable development while addressing environmental challenges.
Similarly, digital infrastructure and technologies like artificial intelligence, data analytics, and cloud computing are becoming the backbone of modern economies and need robust financial support to thrive.
Furthermore, the healthcare sector, particularly in the areas of medical innovation and infrastructure, holds immense potential to transform India into a global leader in healthcare services.
Expanding PSL to include these forward-looking sectors can position India as a hub for innovation and sustainability while driving job creation and economic growth.
Role of Development Finance Institutions (DFIs)
CII has also highlighted the need for a greater role for DFIs in supporting emerging sectors. While institutions like SIDBI and NABFID cater to specific financial needs, their scope is limited by pre-defined mandates. To address this gap, the CII has also recommended the formation of a high-level committee to reassess PSL norms and explore the creation of new DFIs focused on high-potential sectors such as digital infrastructure, green initiatives, and innovative manufacturing.
Budget 2025: Why it’s crucial now
India’s automotive sector offers a case in point. Recently, Honda and Nissan announced plans for a potential merger to compete in the global electric vehicle (EV) market, highlighting the urgency for better financial support for green technologies and digital transformation. This trend reflects a broader shift toward sustainable and technology-driven industries, which require significant credit support to flourish.
Additionally, infrastructure and manufacturing—key pillars of India’s growth story and ‘Make in India’ narrative—are poised to play a significant role in achieving the government’s ambitious targets. Yet, their potential remains underutilized due to limited PSL focus.
Public Sector Banks (PSBs) have traditionally led in meeting PSL targets for agriculture and weaker sections, while private sector banks (PVBs) have caught up in recent years, especially in microenterprise lending. Innovations like Priority Sector Lending Certificates (PSLCs) have further optimized lending strategies, enabling banks to focus on their strengths while meeting regulatory requirements.
With improved asset quality and strategic adaptations, PSL continues to be a vital tool for equitable credit distribution in India.