Non-achievement of PSL targets – Prudential treatment of contribution towards eligible funds with NABARD, NHB, SIDBI and MUDRA Ltd.

## Report on RBI Directive DoR.CRE.REC.2807/10.002/2025-26 Regarding PSL Non-Achievement **1. Executive Summary:** This report analyzes RBI directive DoR.CRE.REC.2807/10.002/2025-26 issued on June 9, 2025. This document clarifies the prudential treatment of contributions made by Primary Urban Cooperative Banks (UCBs) towards eligible funds (NABARD, NHB, SIDBI, MUDRA Ltd., or any other entity specified by RBI) due to shortfalls in achieving Priority Sector Lending (PSL) targets. The key findings are that these contributions will be exempt from exposure norms calculation and will attract a risk weight of 100% for capital adequacy purposes. **2. Introduction:** This report provides an overview and analysis of RBI directive DoR.CRE.REC.2807/10.002/2025-26 concerning the treatment of contributions made by UCBs for non-achievement of PSL targets. The analysis is based solely on the provided policy text. **3. Policy Overview:** * This document is an amendment to existing policies, specifically referencing: * Circular DOR.PCB.BPD.Cir No.1013/05.000/2019-20 dated March 13, 2020 (Exposure Limits and PSL target revision). * RBI circular UBD.No.POT.PCB.Cir.No.4509/116.00/2000-01 dated April 25, 2001 (Capital Adequacy Norms). * RBI Master Direction FIDD.CO.PSD.BC.1304/09.001/2024-25 dated March 24, 2025 (Priority Sector Lending). * **Core Objective(s):** The objective of this amendment is to clarify the prudential treatment (specifically related to exposure limits and risk weighting) of contributions made by UCBs towards eligible funds due to failure to meet PSL targets. This likely aims to provide a more consistent and transparent regulatory framework for these contributions. **4. Background and Rationale:** The amendment likely stems from a need to address ambiguity or inconsistencies in the existing regulations regarding how contributions made by UCBs for PSL target shortfalls are treated from a prudential perspective. By explicitly stating that these contributions are exempt from exposure norms and attract a 100% risk weight, the RBI aims to provide greater clarity and reduce potential for misinterpretation or inconsistent application of the existing rules. This could be due to the nature of these payments, as they do not operate as an ordinary investment, but are made in lieu of policy targets not being met. **5. Key Provisions / Changes:** This is an amendment, and the following provisions are introduced: * **Change:** The prudential exposure limits for UCBs (15% for single borrowers and 25% for groups) as outlined in the March 13, 2020 circular are being modified. * **New Rule:** Contributions by UCBs to eligible funds (NABARD, NHB, SIDBI, MUDRA Ltd., or any other RBI-specified entity) due to PSL shortfalls *will not* be included when calculating the aggregate exposure of the UCB to these counterparties for prudential exposure limit purposes. * **Effect:** This change effectively reduces the pressure on UCBs' exposure limits when they are contributing to these funds due to PSL shortfalls. This may allow UCBs to pursue other lending opportunities without breaching exposure limits. * **Change:** Risk weighting for capital adequacy purposes is being clarified. * **New Rule:** Contributions by UCBs to eligible funds due to PSL shortfalls will be categorized as "all other assets" and attract a risk weight of 100%. * **Effect:** This confirms the risk weight applicable to these contributions, ensuring consistent capital adequacy calculations across UCBs. A 100% risk weight means that UCBs will need to hold capital equivalent to 100% of the contribution amount. **6. Target Audience and Stakeholders:** The primary target audience and stakeholders are: * Primary Urban Cooperative Banks (UCBs) other than Salary Earners Banks. * NABARD, NHB, SIDBI, and MUDRA Ltd. (as recipients of these contributions). * The Reserve Bank of India (RBI) itself, as the regulatory body. **7. Implementation Aspects (Inferred):** * **Responsible Agency/Bodies:** The RBI Department of Regulation is the responsible body for issuing and likely overseeing the implementation of these changes. * **Timelines/Procedures:** The instructions are applicable with immediate effect (as of June 9, 2025). Specific procedures for reporting and calculating exposure limits and capital adequacy ratios will likely be further detailed in related circulars or supervisory guidelines. **8. Expected Outcomes / Impact of Changes:** The intended outcomes of these changes are likely to: * **Provide Clarity:** Reduce ambiguity and ensure consistent application of prudential norms regarding contributions for PSL shortfalls. * **Reduce Constraint:** Ease pressure on UCBs' exposure limits, potentially freeing up capital for other lending activities. * **Maintain Prudential Soundness:** Ensure that capital adequacy calculations appropriately reflect the risk associated with these contributions (through the 100% risk weight). * **Promote PSL Compliance:** Although it may seem counter-intuitive, these changes could incentivize greater efforts towards achieving PSL targets, as UCBs have a clearer understanding of the financial implications of non-compliance. **9. Conclusion:** RBI directive DoR.CRE.REC.2807/10.002/2025-26 provides important clarifications regarding the prudential treatment of contributions made by UCBs for PSL target shortfalls. By exempting these contributions from exposure norms and assigning a 100% risk weight, the RBI is aiming to provide a more transparent and consistent regulatory framework. This will likely impact UCBs' lending strategies and capital management decisions, while also reinforcing the importance of achieving PSL targets.

Key Entities Referenced