23 Jun , 2025 By : Debdeep Gupta
Shares of small finance banks (SFB), namely, Utkarsh, Equitas, Ujjivan, ESAF, AU SFB and Jana SFB rallied up to 4 percent on Monday, June 23, after the Reserve Bank of India tweaked lending norms by reducing its mandatory priority sector lending requirement, covering areas like agriculture and small enterprises by 15 percentage points.
Small finance banks currently have to extend 75 percent of their loans to priority sectors. After the development, the Reserve Bank of India has effectively cut the requirement to 60 percent of total lending.
International brokerage Morgan Stanley views the RBI’s move to revise priority sector lending (PSL) norms as a structural positive. The new guidelines lower the PSL target to 60 percent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher. According to the brokerage, this change will enhance portfolio flexibility and ease compliance, potentially boosting the long-term growth prospects of SFBs.
Citi echoes the same optimism and labels this as a 'significant structural relief for SFBs'. Under the new framework, 40 percent of ANBC will continue to follow existing PSL norms, while the remaining 20 percent can be allocated to sub-sectors offering better yields. Historically, most SFBs have maintained PSL levels above 75 percent—largely driven by microfinance (MFI) lending—except for Suryoday. Citi believes the revised norms will allow diversified SFBs to reduce reliance on the MFI segment, enabling them to expand their non-PSL portfolios and achieve better diversification.
However, SFBs will still have to allocate 40 percent of ANBC to core PSL sub-sectors, while the remaining 20 percent can continue to be directed towards any PSL segments of their choosing.
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