Priority Sector Lending and MSME Classification
The current targets under RBI's 2025 Directions, and the revised MSME limits that decide which loans count.
Priority sector lending (PSL) is RBI's rule that banks must direct a fixed share of their credit to sectors that might otherwise be underserved: agriculture, small businesses, housing for lower-income buyers, education and others. Micro, small and medium enterprises (MSMEs) are the largest non-farm part of it, so the MSME definition decides a lot of PSL classification.
The current rules are RBI's Priority Sector Lending (Targets and Classification) Directions, 2025, issued on 24 March 2025 and in force from 1 April 2025. They replaced the 2020 Directions.
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PSL Targets for Domestic Commercial Banks
All figures are a percentage of Adjusted Net Bank Credit (ANBC) or the credit equivalent of off-balance sheet exposure (CEOBSE), whichever is higher.
| Category | Target |
|---|---|
| Total priority sector | 40% |
| Agriculture | 18% |
| Small and marginal farmers (within agriculture) | 10% |
| Non-corporate farmers (within agriculture) | 14% |
| Micro enterprises | 7.5% |
| Weaker sections | 12% |
Targets for Other Banks
| Bank type | Total PSL target |
|---|---|
| Foreign banks with fewer than 20 branches | 40%, of which up to 32% can be export credit and at least 8% must be other priority sectors |
| Regional rural banks | 75% |
| Small finance banks | 60% |
| Primary (urban) co-operative banks | 60% |
How Achievement Is Measured
- check_circleThe base is ANBC or CEOBSE as on the corresponding date of the preceding year, not the current year's credit.
- check_circleRBI checks achievement every quarter. At year end, it takes the simple average of the four quarters to work out any shortfall or excess.
- check_circleA bank that falls short must place the shortfall in the Rural Infrastructure Development Fund (RIDF) or similar funds, at interest rates linked to the Bank Rate. The bigger the shortfall, the lower the rate the bank earns.
Category Limits a Credit Officer Applies
| Category | What qualifies |
|---|---|
| MSME | All bank loans to MSMEs, as defined under the MSMED Act notifications. Factoring transactions count. Khadi and Village Industries units are treated as micro enterprises. |
| Housing | Loans up to ₹50 lakh in centres with population of 50 lakh and above (dwelling cost up to ₹63 lakh); up to ₹45 lakh in centres of 10-50 lakh (cost up to ₹57 lakh); up to ₹35 lakh in smaller centres (cost up to ₹44 lakh) |
| Education | Loans to individuals for education up to ₹25 lakh |
| Renewable energy | Loans to individuals up to ₹10 lakh |
| Export credit (domestic banks) | Incremental export credit over the same date last year, up to 2% of ANBC or CEOBSE, for borrowers with sanctioned limits up to ₹50 crore |
| Others | For example, loans up to ₹1 lakh to distressed persons to repay non-institutional lenders |
Priority sector and MSME questions. No signup.
Farmer and Weaker Section Terms
- Marginal farmer
- Holds up to 1 hectare of land.
- Small farmer
- Holds more than 1 hectare and up to 2 hectares.
- Weaker sections
- Include small and marginal farmers, artisans and village and cottage industries with small loan limits, beneficiaries of government-sponsored schemes, Scheduled Castes and Scheduled Tribes, DRI scheme beneficiaries, self-help groups and joint liability groups, and women borrowers within a per-borrower cap.
MSME Classification from 1 April 2025
An enterprise is classified on both tests together: investment in plant and machinery or equipment, and annual turnover. Crossing either limit moves it up a category.
Micro
Investment up to
₹2.5 crore
Turnover up to
₹10 crore
Before 1 April 2025
₹1 crore and ₹5 crore
Small
Investment up to
₹25 crore
Turnover up to
₹100 crore
Before 1 April 2025
₹10 crore and ₹50 crore
Medium
Investment up to
₹125 crore
Turnover up to
₹500 crore
Before 1 April 2025
₹50 crore and ₹250 crore
| Category | Investment up to | Turnover up to | Before 1 April 2025 |
|---|---|---|---|
| Micro | ₹2.5 crore | ₹10 crore | ₹1 crore and ₹5 crore |
| Small | ₹25 crore | ₹100 crore | ₹10 crore and ₹50 crore |
| Medium | ₹125 crore | ₹500 crore | ₹50 crore and ₹250 crore |
Confirm the MSME Limits on the Official Notification
These limits come from the Ministry of MSME's notification S.O. 1364(E) of 21 March 2025, effective 1 April 2025, as reported consistently by several sources. The ministry's website could not be reached when this page was written. Check msme.gov.in or the Gazette of India before relying on them for a live proposal, and note that older study material still quotes the 2020 limits.
Worked Classification
Applying the 2025 limits. Both tests must be met for the lower category.
A
Investment
₹2 crore
Turnover
₹8 crore
Category
Micro
Why
Within both micro limits
B
Investment
₹2 crore
Turnover
₹15 crore
Category
Small
Why
Turnover crosses ₹10 crore, so not micro
C
Investment
₹30 crore
Turnover
₹90 crore
Category
Medium
Why
Investment crosses ₹25 crore, so not small
D
Investment
₹100 crore
Turnover
₹600 crore
Category
Not an MSME
Why
Turnover crosses ₹500 crore
| Enterprise | Investment | Turnover | Category | Why |
|---|---|---|---|---|
| A | ₹2 crore | ₹8 crore | Micro | Within both micro limits |
| B | ₹2 crore | ₹15 crore | Small | Turnover crosses ₹10 crore, so not micro |
| C | ₹30 crore | ₹90 crore | Medium | Investment crosses ₹25 crore, so not small |
| D | ₹100 crore | ₹600 crore | Not an MSME | Turnover crosses ₹500 crore |
Why Classification Matters to the Banker
A loan to enterprise A counts toward both the overall 40% target and the 7.5% micro sub-target. A loan to C counts toward PSL but not the micro sub-target. If the borrower's classification changes, so does the bank's PSL report, which is why credit files keep the borrower's Udyam registration up to date.
FAQs
What is the priority sector lending target for banks?expand_more
40% of ANBC or CEOBSE, whichever is higher, for domestic commercial banks, with sub-targets of 18% for agriculture, 7.5% for micro enterprises and 12% for weaker sections.
What is the PSL target for small and marginal farmers?expand_more
10% of ANBC or CEOBSE under the 2025 Directions. Older material that quotes 8% is out of date.
Do all loans to MSMEs count as priority sector?expand_more
Yes. Under the 2025 Directions, all bank loans to MSMEs that meet the MSMED Act definition qualify, including medium enterprises.
What is the current definition of a micro enterprise?expand_more
From 1 April 2025, investment in plant and machinery or equipment up to ₹2.5 crore and turnover up to ₹10 crore. Confirm on the Ministry of MSME notification before relying on it.
How is PSL achievement calculated?expand_more
Against ANBC or CEOBSE as on the corresponding date of the preceding year, checked each quarter, with the year-end position taken as the simple average of the four quarters.
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