Incentive framework: It establishes an incentive framework for districts with lower credit flow starting from FY25.
- More weight (125%) will be given to fresh priority sector loans in districts where loan availability is low (less than Rs 9,000 per person).
Disincentive framework: In districts with high loan availability (more than Rs 42,000 per person), the loans will have a weight of 90%.
Other districts: With exception of outlier districts with low credit availability and those with high loan sizes, all other districts will continue to have the current importance level of 100%.
MSME loans: All bank loans to MSMEs shall qualify for classification under PSL.

About Priority Sector Lending (PSL)

Priority Sector means those sectors which Government and RBI consider as important for development of the country and are to be given priority over other sectors.
Objective
- To ensure that vulnerable sections of society and underdeveloped areas get access to credit.
- To direct a portion of bank credit to specified sectors and sub-sectors that impact large segments of the population and are crucial for the economy.
PSL was formalized in 1972 to facilitate flow of credit to such sectors, which though creditworthy, are unable to access credit from formal financial institutions.
Various Committees associated with PSL includes:
- Gadgil Committee, 1969 recommended adoption of Area Approach based on which ‘Lead Bank Scheme’ was adopted.
- Ghosh Committee (1982) in which Priority sector categories very revised.

Targets /Sub-targets for Priority sector Lending for Different Types of Banks
Categories	Domestic commercial banks & foreign banks with 20 branches and above	Foreign banks with less than 20 branches	Regional Rural Banks	Small Finance Banks
Total Priority Sector	40% of ANBC or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE), whichever is higher	Same as Domestic commercial bank	75% of ANBC or CEOBE whichever is higher	75% of ANBC or CEOBE whichever is higher.
Agriculture	18% of ANBC or CEOBE, whichever is higher; out of which a target of 10% is prescribed for Small and Marginal Farmers	Not applicable	Same as Domestic commercial bank	Same as Domestic commercial bank
Micro Enterprises	7.5% of ANBC or CEOBE, whichever is higher	Not applicable	Same as Domestic commercial bank	Same as Domestic commercial bank
Advances to Weaker Sections	12%of ANBC or CEOBE, whichever is higher	Not applicable	15% of ANBC or CEOBE, whichever is higher	Same as Domestic commercial bank
Note: Priority Sector Lending guidelines is also applicable on Primary Urban Co-operative Banks.

Positive Impact of priority sector lending on Indian economy:

Financial Inclusion: PSL norms ensure that credit reaches under banked segments of population e.g. SMFs, women, and weaker sections.
Support to Agriculture: Agricultural credit increased from 2000 to 2020 at a compound annual growth rate (CAGR) of 19.81% due to mandatory 18% lending by commercial banks & other policies.
Promotion of MSMEs: By facilitating credit flow to MSMEs, PSL helps in creating jobs and boosting local economies.
Income Augmentation: A case study of Andhra Pradesh showed that Beneficiaries reported enhanced income.

Non-Performing Assets (NPAs): Outstanding loan in priority sector has significant negative impact on banks.
- According to some studies, PSL was found responsible for more NPA generation and writing-off of NPA as well.
Increased costs: PSL increased administrative and transactional cost of banks.
Other issues with PSL: Low banks Profitability, increased Government Interference etc.

Strengthen Microfinance Institutions and Encourage Opening of “Small” Finance Banks: MFIs could significantly increase the credit supplied to unbanked rural and semi-urban areas through their vast distribution network and business model of “last mile connectivity.”
Use of Technology: E.g. Mobile banking app for loan approval to farmers to Reduce Cost of Credit Delivery and increase the reach and efficiency of PSL, especially in rural and remote areas.
Create a robust credit infrastructure and Risk Assessment Tools: To better evaluate the creditworthiness of borrowers and reduce the incidence of Non-Performing Assets (NPAs).