Your compliance head receives a Reserve Bank of India (RBI) notice flagging Priority Sector Lending (PSL) classification discrepancies. The issue isn’t underreporting your PSL portfolio—it’s that the same underlying loans appear in multiple banks’ PSL claims. Different lenders financed the same Microfinance Institution (MFI), and each bank claimed the on-lending benefit for identical borrowers.
This scenario became significantly harder to defend after heightened RBI scrutiny that surfaced around late 2024, and subsequent PSL direction amendments that mandated external auditor certification for on-lending claims.
The Reserve Bank has amended its PSL directions to mandate external auditor certificates from banks claiming PSL benefit for on-lending via MFIs, Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and the National Cooperative Development Corporation (NCDC). Banks can no longer rely solely on internal verification when claiming PSL credit for loans channelled through these intermediaries. The new framework requires documentary proof that no loan is simultaneously counted as priority sector credit by more than one institution.
Why RBI Tightened PSL Compliance
The regulatory action followed enforcement cases that came to light in December 2024. HDFC Bank and ICICI Bank disclosed that RBI directed them to provide additional standard provisions of ₹500 crore and ₹1,283 crore respectively, for agriculture-related accounts that failed to meet PSL criteria despite being reported as compliant. These provisions, representing identified gaps in PSL classification accuracy, demonstrated the scale of the verification problem RBI is now addressing through the new auditor certification framework.
When lenders finance NBFCs or MFIs that on-lend to eligible PSL categories, the risk of multiple banks claiming credit for the same underlying loan increases. An NBFC borrowing from three banks to fund micro-enterprise loans could theoretically generate PSL credit for all three lenders if verification gaps exist.
The amended directions address this by requiring intermediaries to certify that on-lending benefits haven’t been claimed elsewhere.
Core Requirements for PSL Auditor Certification
Banks must now obtain external auditor certificates and maintain borrower-level data for all PSL claims through intermediaries.
Mandatory Documentation
Banks financing intermediaries for PSL on-lending must now obtain external auditor certificates confirming that no other bank has claimed the same loans. This applies across three intermediary categories: MFIs for agriculture, Micro, Small and Medium Enterprises (MSMEs), social infrastructure, and other PSL segments; NBFCs for PSL-eligible assets; and HFCs for individual dwelling units up to ₹20 lakh per borrower.
Borrower-Level Data Requirements
The certification process requires banks to maintain borrower-wise details of the underlying portfolio. When ICICI Bank finances an MFI that on-lends to 5,000 micro-enterprises, ICICI must hold granular data on those 5,000 loans, not aggregate MFI portfolio figures. The external auditor’s certificate then confirms that no other bank has claimed PSL credit for those specific 5,000 borrowers.
RBI permits banks to combine external auditor certificates with internal sample checks. Your internal policy must specify this verification split and maintain consistency across intermediaries.
Specific Obligations by Intermediary Type
Certification requirements vary depending on whether you’re financing MFIs, NBFCs, or HFCs, with each category requiring specific documentation protocols.
MFI Lending
Banks obtain auditor certificates confirming adherence to RBI’s MFI conditions and verifying that on-lending benefits for agriculture, MSME, social infrastructure, or other PSL categories haven’t been claimed by multiple banks. Since MFIs often borrow from several banks simultaneously, the certificate must explicitly map which loans correspond to which bank’s funding.
NBFC Financing
Banks can claim PSL credit only to the extent of outstanding balances supported by existing underlying assets. If an NBFC holds a ₹100 crore loan book but your bank’s exposure is ₹30 crore, your PSL claim cannot exceed ₹30 crore even if the entire NBFC portfolio qualifies under PSL categories.
HFC Financing
PSL credit applies only for loans funding the purchase, construction, or reconstruction of individual dwelling units, or for slum clearance and rehabilitation, with an aggregate limit of ₹20 lakh per borrower. The external auditor must verify both purpose eligibility and per-borrower limit compliance.
Additional Regulatory Changes in the PSL Framework
Export credit to agriculture and MSMEs now qualifies as PSL in respective categories, subject to aggregate limits. Co-lending arrangements explicitly receive PSL recognition (when banks partner with NBFCs or MFIs, the bank’s share counts toward PSL targets, provided all certification requirements are met).
RBI has banned service charges and ad hoc inspection charges on PSL loans up to ₹50,000. For Self-Help Groups (SHGs) and Joint Liability Groups (JLGs), the ₹50,000 threshold applies per member, not per group.
Implementation Approach for Compliance
Moving from policy acknowledgement to operational compliance requires systematic changes across your intermediary financing workflow.
Immediate Action Steps
Start by mapping your existing PSL portfolio across intermediaries. Identify which MFIs, NBFCs, and HFCs you’ve financed for on-lending, then determine whether you hold borrower-level data or only aggregate portfolio information. If you’re working with aggregate data, renegotiate data-sharing agreements with intermediaries to obtain the granular details RBI now requires.
Audit Coordination
Engage external auditors early. The certification requirement adds a compliance layer that most intermediaries haven’t dealt with previously. MFIs borrowing from five banks now need five separate auditor certificates, each confirming non-duplication for that specific bank’s exposure.
Policy Updates and Reporting
Update internal policies on verification splits. Decide what percentage of underlying portfolios your team will sample-check versus relying on auditor certificates. Banks must submit PSL data within 15 days of quarter-end and provide annual reports within one month of financial year-end. This compressed timeline requires real-time portfolio tracking rather than retrospective compliance exercises.
Platforms like Finezza’s Loan Management System (LMS) maintain borrower-level PSL categorisation throughout the lending lifecycle, automatically flagging when underlying portfolios change or when intermediary reporting creates potential duplication risks.
What This Means for Lenders
The new certification regime transforms PSL compliance from a reporting exercise into an operational workflow. Your relationship managers financing MFIs or NBFCs now need to collect and verify borrower-level data as standard practice, not as an annual audit requirement.
For lenders relying heavily on intermediary financing to meet PSL targets, the auditor certification requirement adds cost and complexity. Budget for external audit fees across multiple intermediaries and build data management infrastructure to handle granular portfolio tracking. The alternative (failing to meet PSL targets and paying penalties into the Rural Infrastructure Development Fund) costs more than compliance investments.
The amended framework has always been mandatory, but enforcement operated in a grey zone where banks treated submission timelines and verification depth as flexible guidelines rather than strict mandates. RBI’s actions in late 2024 against major banks signalled that this flexibility no longer exists.
Moving Forward with PSL Certification
RBI’s strengthened PSL norms require operational changes beyond policy updates. Lenders financing intermediaries must establish data pipelines for borrower-level tracking, coordinate external auditor engagements, and implement real-time monitoring to prevent double-claiming across institutions.
The revised PSL norms took effect on January 19, 2026. Banks must apply the external auditor certification framework immediately for all fresh on-lending through MFIs, NBFCs, and HFCs originated after this date. For existing portfolios, lenders have until the end of Q2 FY 2026-27 to establish full documentation infrastructure and system integration for legacy on-lending claims.
This transition window allows banks to recalibrate portfolio allocation strategies and upgrade internal systems without immediately disqualifying existing PSL claims. However, quarterly reporting obligations remain binding throughout this period, with data submissions due within 15 days of each quarter-end.
Ready to automate PSL compliance tracking with borrower-level accuracy?
Schedule a demo to see how Finezza’s Loan Management System maintains audit-ready PSL documentation throughout the lending lifecycle.
Leave a Reply