A report by the Economic Advisory Council to the Prime Minister has flagged sharp regional imbalances in priority sector lending, calling for a more equity-focused framework. According to the report, state capitals and major industrial centres capture the lion's share of priority sector lending, while the Himalayan states, North-east, eastern Uttar Pradesh, Bihar, Jharkhand, Odisha, and parts of Madhya Pradesh and Rajasthan remain systematically underserved. The analysis reveals that among all sectors, the skew is sharpest in micro, small and medium enterprise lending, with just 11.5 per cent of districts cornering 67 per cent of flows.
Since 1980, the 40 per cent PSL target for scheduled commercial banks has remained unchanged. The 2025 revision lowered the target for small finance banks and urban co-operative banks to 60 per cent from 75 per cent. As reported by the Economic Advisory Council, micro and small enterprises overtook agriculture in PSL share for the first time in FY26, marking a significant shift in lending priorities.
According to the report, housing and education loans have decreased by 15 per cent and 48 per cent, respectively, over the past seven years. This decline in essential lending categories highlights the changing focus of priority sector lending away from social infrastructure and towards enterprise development.
Private sector banks have led on PSL targets since overtaking public sector banks in FY22. The State Bank of India (SBI) and private banks hold the highest outstanding deposits in the Rural Infrastructure Development Fund. On Priority Sector Lending Certificates (PSLCs), SBI is a net buyer, while small finance banks and nationalised banks are net sellers. Additionally, gross non-performing assets from PSL more than doubled between FY16 and FY25.
