RBI To Banks: Stop Overcharging On Priority Sector Loans Up To Rs 50,000 – What Does It Mean?

The Reserve Bank of India (RBI) has made it clear that banks cannot impose excessive charges, particularly on smaller loan amounts under the priority sector lending (PSL) category.

Moreover, the RBI stated that no loan-related and ad hoc service charges or inspection charges shall be levied on priority sector loans up to Rs 50,000. Furthermore, this step aims to protect small borrowers from unnecessary financial burdens and ensure fair lending practices. It said, “No loan related and ad hoc service charges/inspection charges shall be levied on priority sector loans up to Rs 50,000.”

Additionally, the RBI has issued new Master Directions on Priority Sector Lending (PSL), which will come into effect on April 1, 2025. The updated guidelines are set to replace the existing framework established under the 2020 PSL directions.

In these guidelines, the central bank has also clarified that loans taken against gold jewellery acquired by banks from Non-Banking Financial Companies (NBFCs) will not be considered under the priority sector lending category. This means banks cannot classify such loans as part of their PSL targets.

RBI Directive: What Does It Mean?

The move is intended to ensure that priority sector funds are directed towards sectors that genuinely need financial support, such as small businesses, agriculture, and weaker sections of society.

It said, “Loans against gold jewellery acquired by banks from NBFCs are not eligible for priority sector status.”

The RBI has also assured that all loans categorized under the earlier PSL guidelines (2020 framework) will remain eligible for priority sector classification until their maturity. This move ensures continuity for borrowers and banks, allowing them to follow a smooth transition to the new guidelines.

To ensure better compliance with PSL targets, the RBI will introduce a more rigorous monitoring system. Banks will now be required to submit detailed data on their priority sector advances on a quarterly and annual basis.

As per the guidelines, the data must be reported within fifteen days from the end of each quarter and within one month from the end of the financial year. This step is designed to enhance transparency and accountability in PSL implementation.

Banks that fail to meet their prescribed PSL targets will be required to contribute to the Rural Infrastructure Development Fund (RIDF) and other financial schemes administered by NABARD and similar institutions.

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This ensures that even if banks do not meet their direct lending obligations, they still support priority sector development through financial contributions.

The RBI has also reaffirmed that outstanding loans extended under specific COVID-19 relief measures will continue to be classified as priority sector lending. This decision is aimed at supporting sectors that are still recovering from the economic impact of the pandemic.

With these new PSL guidelines, the RBI aims to foster financial inclusion and developmental goals. By ensuring that underserved sectors receive the necessary financial support, the central bank is working towards strengthening the nation’s socio-economic growth. The updated PSL framework reflects RBI’s commitment to ensuring fair lending practices and directing credit to sectors that need it the most. 

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