SBI Research has requested the RBI to increase home and education loan limits under the Priority Sector Lending framework to match current market costs. The report highlights that many banks are missing core lending targets by relying on certificates instead of direct loans.
A new report from SBI Research is calling for the Reserve Bank of India (RBI) to modernize its five-decade-old Priority Sector Lending (PSL) framework. The proposal seeks to raise loan eligibility limits to better align with today’s higher property prices and increased tuition costs for students.
Proposed Changes for Home and Education Loans
The research suggests doubling the PSL-eligible limit for education loans from the current ₹25 lakh to ₹50 lakh. This change is intended to support students facing rising costs in professional courses and those studying abroad. For housing, the report recommends raising the eligibility limit to ₹1 crore for homes in metropolitan areas and ₹75 lakh in other regions. Current rules cap these at ₹50 lakh in large cities, a threshold that SBI Research notes is becoming restrictive as the average new housing loan size is already nearing ₹45-50 lakh.
Shift in How Banks Meet PSL Targets
A significant concern raised by the report is the method banks use to comply with the mandate that 40% of their adjusted net bank credit must go to priority sectors. While official figures show banks meeting these targets, the report reveals that this is increasingly achieved through indirect methods such as buying Priority Sector Lending Certificates (PSLCs) and depositing funds into the Rural Infrastructure Development Fund.
Data from the report shows that the trading volume of PSLCs grew from ₹1.8 lakh crore in FY18 to ₹12.2 lakh crore in FY25. When these indirect instruments are excluded, the report estimates that actual organic priority sector lending by banks stood at 34.4% in FY25, which is below the mandatory 40% requirement.
Future Framework Overhaul
Beyond updating loan limits, the report suggests a broader review of the PSL system to address modern financial needs. The proposed changes include integrating climate-related financing and infrastructure lending into the priority sector. It also recommends adjusting the current structure of the Rural Infrastructure Development Fund to incentivize financial institutions to engage in more direct lending rather than relying on automated compliance tools. Investors and market observers will now track whether the central bank initiates a formal review of these norms, which could influence the lending strategies of commercial banks across the country.