Priority Sector Lending (PSL) mandates banks allocate 40% of Adjusted Net Bank Credit (ANBC) to priority sectors. Agriculture receives 18% allocation, comprising 13.5% direct lending (farm credit, crop loans, infrastructure) and 4.5% indirect lending (NABARD refinancing, food processing, rural housing). Small and marginal farmers get 8% sub-target within agriculture PSL. Foreign banks follow differential targets. RBI periodically revises PSL guidelines, with latest amendments in 2020 expanding scope and introducing new categories for renewable energy and social infrastructure financing.

PSL ensures banking system serves developmental priorities rather than only profitable segments. Agriculture PSL addresses credit gaps in rural areas where farmers lack collateral and formal credit history. Direct lending includes crop loans, farm mechanization, allied activities like dairy and fisheries. Indirect lending covers NABARD refinancing to cooperative banks, warehouse infrastructure, food processing units that enhance agricultural value chains. The 8% sub-target for small/marginal farmers (land holding below 2 hectares) recognizes their higher vulnerability and limited access to formal credit. Banks missing targets must contribute to Rural Infrastructure Development Fund (RIDF) managed by NABARD at below-market rates. This mechanism effectively subsidizes rural infrastructure while penalizing non-compliance. PSL certificates allow banks to trade surplus lending, creating market-based compliance mechanism. The policy balances financial inclusion objectives with banking viability, though critics argue it distorts credit allocation and may compromise loan quality in pursuit of targets.