A new report by SBI Research has recommended a comprehensive overhaul of India’s Priority Sector Lending (PSL) framework, proposing reforms that would channel greater credit towards infrastructure development, renewable energy, housing, and education. The report argues that updating the decades-old lending norms is essential to support India’s long-term economic growth and its vision of becoming a developed nation by 2047.

Priority Sector Lending requires banks to allocate a prescribed portion of their lending to sectors considered crucial for inclusive economic development, such as agriculture, micro and small enterprises, education, housing, and renewable energy. According to SBI Research, the country’s changing economic landscape and evolving financing requirements call for a fresh review of the existing framework to make it more relevant and effective. The report noted that banks have already exceeded the mandatory PSL target of 40% of Adjusted Net Bank Credit (ANBC), with provisional estimates placing priority sector lending at nearly 45% in FY26.

One of the report’s key recommendations is to bring all infrastructure loans under the priority sector category or alternatively exclude such loans from ANBC calculations for PSL compliance. The economists believe this would encourage banks to provide more long-term financing for infrastructure projects, particularly at a time when India’s corporate bond market is still developing. Enhanced infrastructure financing, the report says, is essential to meet the country’s ambitious development goals and support large-scale investments in transport, energy, logistics, and urban infrastructure.

The report also proposes significant changes to housing finance norms. It recommends increasing the PSL eligibility limit for home loans to ₹1 crore in metropolitan cities and ₹75 lakh in non-metro locations, reflecting the sharp rise in residential property prices over recent years. SBI Research believes that the existing thresholds no longer correspond with prevailing housing costs, limiting the effectiveness of PSL in supporting affordable home ownership.

In addition, the report recommends doubling the PSL limit for education loans from the current level to ₹50 lakh, enabling students to access adequate financing for higher education in India and abroad. It also suggests raising loan limits for renewable energy projects, arguing that larger investments will be necessary to achieve India’s clean energy targets and accelerate the transition towards a low-carbon economy.

SBI Research noted that India’s green finance market is expected to expand rapidly over the coming years, driven by ambitious renewable energy goals and increasing investments in sustainable infrastructure. Revising PSL norms to accommodate larger green energy projects would help mobilize greater institutional funding while supporting national climate commitments and energy security objectives.

The report concludes that modernising the Priority Sector Lending framework would improve financial inclusion while ensuring that bank credit aligns with India’s emerging development priorities. By encouraging greater investment in infrastructure, affordable housing, education, and renewable energy, the proposed reforms could strengthen economic growth, enhance sustainability, and create a more resilient financial system capable of meeting the country’s future financing needs.