The Reserve Bank of India (RBI) has proposed a separate and consolidated regulatory framework for Priority Sector Lending (PSL) by Urban Co-operative Banks (UCBs), while retaining the existing overall lending target of 60 percent and leaving the key sub-targets unchanged.
The move is primarily aimed at simplifying and reorganising existing regulatory instructions rather than introducing a major change in priority sector lending obligations for cooperative banks.
On Thursday, the RBI released the draft Reserve Bank of India (Urban Co-operative Banks – Priority Sector Lending – Targets and Classification) Directions, 2026, inviting comments from stakeholders until November 26, 2026.
At present, UCBs are governed by the broader Priority Sector Lending Master Directions, 2025, which also cover commercial banks, regional rural banks, small finance banks and local area banks. Under the proposed arrangement, UCBs will have their own dedicated set of Directions.
Importantly, the RBI has not proposed any increase in the existing PSL targets. The overall target remains at 60 percent of Adjusted Net Bank Credit (ANBC) or the Credit Equivalent of Off-Balance Sheet Exposures (CEOBSE), whichever is higher. The sub-targets of 7.5 percent for micro enterprises and 12 percent for weaker sections also remain unchanged.
The proposed Directions bring together provisions relating to agriculture, MSMEs, exports, education, housing, social infrastructure, renewable energy and other eligible priority sector activities.
They also consolidate existing provisions governing Priority Sector Lending Certificates (PSLCs), which allow banks to meet PSL obligations through certificate trading without transferring underlying loan assets or credit risk.
The framework covers quarterly monitoring of PSL performance, treatment of shortfalls, eligible on-lending arrangements and compliance requirements.
Banks falling short of prescribed targets may be required to contribute to designated funds maintained with NABARD, NHB, SIDBI or MUDRA, as determined by the RBI. Non-achievement of PSL targets may also be considered while granting regulatory approvals.
The draft further clarifies that loans already classified as priority sector advances under the earlier Master Directions will continue to retain their eligibility until maturity.
Once the final Directions are issued, the existing instructions relating to PSL targets and classification applicable to UCBs will be repealed, with the RBI separately notifying the relevant repeals.
The proposed framework will apply to all Urban Co-operative Banks except Salary Earners’ Banks.
The RBI has invited feedback through its Connect 2 Regulate platform or by email at fiddpsd@rbi.org.in
