RBI seeks comments on draft priority sector lending guidelines

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RBI priority sector lending guidelines

Highlights

RBI issued an integrated draft of directions on priority sector lending targets and classification for all banks, inviting comments by November 26, 2026.
Once the final consolidated directions are issued, older, conflicting guidelines will be repealed, and banks will be notified separately.
The new directions will bring greater clarity to compliance, reporting, and classification, while requiring banking institutions to comprehensively review their internal processes.

This article was translated from the original. Read the original version by our correspondent here.

Scope and timeline of the draft directions

According to a Reserve Bank of India press release, the central bank has reviewed the existing priority sector lending guidelines as part of its effort to consolidate directions issued over time and has proposed issuing entity-wise directions on the subject. Accordingly, the draft directions have been posted on its website for public comments.

The drafts include separate 2026 directions on priority sector lending targets and classification for commercial banks, Small Finance Banks, Local Area Banks, Regional Rural Banks, and Urban Co-operative Banks. The RBI said that directions not included in these consolidated draft guidelines will be repealed once the final directions are issued, and this will be communicated separately.

Stakeholders may submit their comments by November 26, 2026, through the 'Connect 2 Regulate' section of the RBI website or by email. The email subject line must include the full name of the relevant draft directions, including the type of regulated entity.

Potential impact on banks and regulatory compliance

This consultation could bring greater clarity to priority sector lending compliance for banks and other regulated entities through a more clearly defined, category-wise framework. Consolidating the targets and classifications for different entities into separate directions could lead to greater consistency in compliance, reporting, and regulatory interpretation.

In India's banking sector, the PSL framework is considered important for directing credit to agriculture, micro and small enterprises, and other specified sectors. Once the final directions are issued, institutions may need to review their internal compliance frameworks, classification processes, and reporting arrangements.

In our previous report on Indian banks we discussed the practice of indirect evergreening and how it can be used to delay the recognition of bad loans. The article explained that funds are routed through related parties to create the appearance of loan repayment, even though such loans are relatively more prone to default, potentially increasing risks to the financial stability of the banking system.

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