State Bank of India economists are recommending that infrastructure loans be classified under Priority Sector Lending to address funding gaps. This proposal aims to support long-term national development goals by making it easier for banks to meet their mandatory lending targets. The plan also suggests raising credit limits for housing, education, and renewable energy to reflect current market costs.
Economists at the State Bank of India have suggested a structural update to the current Priority Sector Lending framework. Banks in India are currently required to direct 40% of their adjusted net bank credit to specific sectors such as agriculture and small businesses. The report notes that many lenders find it difficult to meet these mandates, which is reflected in the high volume of trading in Priority Sector Lending Certificates. These certificates allow banks to buy credits from others to meet their targets, and the market for them grew from Rs 1.8 lakh crore in FY18 to Rs 12.2 lakh crore in FY25.
Supporting Infrastructure Growth
The central argument of the report is that India needs substantial long-term capital to meet its infrastructure goals by 2047. Since the corporate bond market is not yet deep enough to provide all this long-term funding, bank loans become a primary source of finance. The SBI economists suggest that if infrastructure projects were classified under the priority sector, banks would be more encouraged to fund them. Alternatively, they propose excluding infrastructure loans from the calculation of net bank credit altogether, which would effectively lower the baseline amount banks need to fulfill for their other priority sector obligations.
Proposed Changes for Housing and Energy
Beyond infrastructure, the report addresses how current lending limits for other sectors have not kept pace with rising costs. For housing, the suggestion is to increase the loan limit for priority sector classification to Rs 1 crore in metropolitan areas and Rs 75 lakh in other regions. This adjustment acknowledges that property prices have increased significantly since these limits were last set.
Similarly, the report recommends doubling the educational loan limit for priority classification to Rs 50 lakh to better support higher education costs. For the renewable energy sector, the proposal is more aggressive, suggesting that the project cost threshold to qualify as a priority loan could rise to Rs 100 crore. Additionally, the limit for individual rooftop solar projects could be increased to Rs 2 crore, a significant jump from the current Rs 10 lakh cap.
These recommendations are currently part of a research report and do not represent a change in policy by the Reserve Bank of India. The next stage to monitor will be whether the regulator initiates a formal review or consultation process regarding these specific PSL guidelines. Investors should track whether such changes, if adopted, lead to a rebalancing of bank loan books toward infrastructure and how that shift affects the overall interest margins and risk profiles of banking institutions.