The Reserve Bank of India has introduced stringent compliance measures for priority sector lending (PSL), requiring all intermediary lenders to provide external auditor certificates to prevent multiple banks from claiming the same loan under priority sector categories. The enhanced framework targets microfinance institutions, non-bank finance companies, and housing finance companies as key intermediaries in the lending chain.

Regulatory Response to Compliance Issues

The revised framework follows recent regulatory action against major banks including ICICI Bank and HDFC Bank for over-classification of agricultural loans under priority sector lending. These institutions had categorized loans as agricultural priority sector lending even when the funds were utilized for non-farm purposes, prompting the central bank to strengthen oversight mechanisms.

New Certification Requirements

Under the updated norms, all scheduled banks must obtain external auditor certificates from their intermediary partners. The certification process covers three key categories of financial institutions:

The Reserve Bank has emphasized that banks must establish robust internal systems and controls to monitor the end-use of funds categorized under priority sector lending. This includes ensuring that loans are utilized only for approved purposes as defined under PSL guidelines.

Lending Limits and Categories

The existing framework for priority sector lending through intermediaries remains unchanged, with specific limits maintained for different categories:

These limits are calculated based on individual bank's total priority sector lending from the previous financial year. Bank loans to NBFC-MFIs specifically target individuals and members of self-help groups and joint liability groups engaged in farming and small business activities.

Enhanced Monitoring Framework

The central bank has expanded the scope of priority sector lending to include bank credit extended to the National Cooperative Development Corporation (NCDC) for on-lending to cooperative societies. This addition broadens the reach of priority sector benefits while maintaining strict compliance standards.

Compliance monitoring will be conducted on a calendar quarter basis, allowing for more frequent assessment of bank adherence to the revised norms. The RBI stated that the primary objective of these enhanced compliance measures is to ensure continuous and legitimate flow of credit to priority sectors of the economy.

Implementation and Oversight

The strengthened framework represents a significant shift toward more rigorous oversight of priority sector lending practices. Banks are now required to implement comprehensive verification processes before claiming priority sector benefits for loans extended through intermediary channels. The quarterly monitoring system will enable the Reserve Bank to identify and address compliance issues more promptly, ensuring that priority sector lending serves its intended purpose of supporting critical economic segments.

Reserve Bank of India Governor Sanjay Malhotra has called upon urban cooperative banks to maintain high standards of governance, emphasizing that strong oversight underpins the stability and credibility of the cooperative banking sector. The governor made these remarks during a meeting in Mumbai with chairpersons, managing directors and chief executive officers of select urban cooperative banks as part of RBI's ongoing engagement with regulated entities.

Key Focus Areas Highlighted

During his address, Malhotra outlined several critical areas requiring attention from UCB leadership:

Role in Financial Inclusion

The governor acknowledged the continued relevance of UCBs in credit delivery, particularly emphasizing their importance in underserved and semi-urban areas. He noted that the sector remains an important pillar of the formal financial system, especially for small borrowers, local businesses and communities that are often outside the reach of large commercial banks. This recognition underscores the strategic importance of UCBs in furthering financial inclusion across India.

Regulatory Initiatives and Reforms

Malhotra referenced various policy initiatives undertaken by RBI for the cooperative banking sector since the previous interaction held on 19 March 2025. The governor expressed confidence that these measures would act as enablers for the sector to strengthen itself and grow in a healthy and sustainable manner. While specific steps were not detailed, he indicated that regulatory reforms and supervisory actions were aimed at improving resilience and long-term viability of the sector.

Customer-Centric Approach

Beyond financial soundness, the governor emphasized the need for UCBs to adopt a customer-centric approach. He called on banks to:

• Adhere to ethical practices in all operations
• Ensure timely grievance redressal mechanisms
• Maintain transparency in their dealings with customers
• Preserve depositor confidence through sound practices

Malhotra noted that customer trust was central to the sector's relevance and continued growth, making these practices essential for long-term sustainability.

Meeting Participation and Dialogue

The meeting saw participation from senior RBI leadership, including Deputy Governors Swaminathan J. and S.C. Murmu, along with other senior RBI officials. Representatives from the National Urban Cooperative Finance and Development Corporation Ltd and the National Federation of Urban Co-operative Banks & Credit Societies Ltd were also present. During the interactive session, participants shared feedback and suggestions on policy and operational issues affecting the sector, reflecting the ongoing dialogue between the regulator and cooperative banks.