Equitas, Ujjivan, AU Small Finance Bank Rally as RBI Cuts Priority Sector Lending Norms to 60%

In a move welcomed by the banking sector, especially Small Finance Banks (SFBs), the Reserve Bank of India (RBI) has relaxed the priority sector lending (PSL) requirement—reducing the mandated PSL threshold from 75% to 60% of total lending. The change triggered a rally in SFB stocks, with Equitas, Ujjivan, ESAF, Utkarsh, AU SFB, and Jana SFB gaining up to 4% in intraday trading on Monday, June 23.

Updated RBI Lending Guidelines for Small Finance Banks

Under the revised guidelines, SFBs must now allocate 60% of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE)—whichever is higher—towards priority sector lending, down from the earlier mandate of 75%.

This 60% is split as follows:

• 40% must still be directed to core PSL sub-sectors (such as agriculture, MSMEs, and housing).
• 20% can now be flexibly allocated across PSL sub-segments, offering higher yield potential.

Why It Matters for SFBs?

As per news reports, this as a structural relief that allows SFBs to rebalance their loan portfolios. Historically, many SFBs have maintained PSL levels above 75%, largely due to their focus on microfinance lending (MFI). The revised norms will enable them to diversify away from microfinance and toward non-PSL or high-yield PSL segments.

The reduction in PSL requirements also means a lighter regulatory load, giving SFBs more room to optimise returns and enhance risk management without breaching RBI thresholds.

Small Finance Banks’ Share Price Performance

Despite a broad market decline and a 0.91% drop in the Nifty 50, shares of all listed Small Finance Banks (SFBs) traded in green on June 23, 2025.

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Conclusion

The RBI's decision to ease PSL norms marks a turning point for the small finance banking sector. By reducing PSL obligations to 60%, the central bank has granted SFBs greater flexibility to diversify and grow more sustainably. As compliance pressure eases and yield opportunities widen, SFBs are better positioned to tap into a broader lending base.

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