Priority Sector Lending mandates banks to lend 40% of Adjusted Net Bank Credit to specified sectors like agriculture, MSMEs, education, housing, and renewable energy. Introduced to ensure credit flow to underserved segments, PSL includes sub-targets: 18% for agriculture, 7.5% for MSMEs, and specific allocations for weaker sections. Non-compliance attracts penalties. PSL Certificates, launched in 2016, allow banks to trade excess PSL achievements, creating a market-based mechanism for meeting targets while maintaining overall sector credit flow.

Priority Sector Lending represents RBI's directed credit policy to ensure financial inclusion and balanced economic growth. The 40% mandate applies to domestic commercial banks' Adjusted Net Bank Credit, calculated as net bank credit minus bills rediscounted with RBI and other approved institutions. Agriculture receives the highest allocation at 18%, reflecting India's agrarian economy, while MSMEs get 7.5% to support entrepreneurship and employment generation. The weaker sections sub-target of 10% within agriculture ensures credit reaches marginal farmers and landless laborers. PSL Certificates create a secondary market where surplus-achieving banks can sell certificates to deficit banks, typically trading at 0.25-1% of face value. This mechanism maintains aggregate PSL compliance while allowing operational flexibility. Regional Rural Banks and Small Finance Banks have modified targets reflecting their specialized mandates. The policy balances commercial viability with social objectives, though critics argue it distorts credit allocation and may compromise asset quality in pursuit of targets.