SBI Economists Push Infra Loans as Priority Sector Lending

State Bank of India's economics team wants infrastructure loans classified as priority sector lending. The proposal, outlined in a recent note, argues that banks are struggling to meet their priority sector targets without buying certificates from other lenders. Including infrastructure loans would let banks count real lending toward those goals.

The economists also called for higher caps on housing and education loans, and a significant increase in renewable energy project loan limits. The changes would align priority sector guidelines with national development priorities, they said.

Priority sector lending requires banks to direct a fixed percentage of their loans to agriculture, small businesses, education, housing, and other designated categories. When banks fall short, they purchase priority sector lending certificates from institutions that have exceeded their targets. That market has grown as more banks struggle to originate enough qualifying loans.

Infrastructure lending is currently excluded from priority sector status, even though large projects often need long-term bank financing. India's corporate bond market remains shallow, leaving banks as the primary source of debt for roads, ports, and power plants. Making infrastructure loans count toward priority sector targets would give banks an incentive to lend more to these projects, the economists argued.

The housing loan limit has not been revised since 2014, the note said. The economists proposed raising it to reflect higher property prices. Education loan limits also need an update, they said, to cover rising tuition costs.

Renewable energy loans face a separate cap that the economists called too low to support the government's green energy targets. A higher limit would let banks finance larger solar and wind projects without exhausting their priority sector quota.

The proposal comes as the Reserve Bank of India reviews its priority sector lending guidelines. No decision has been announced. If adopted, the changes would shift how banks allocate capital across sectors. Infrastructure companies would gain a new source of bank credit. Banks would reduce their reliance on certificate purchases. Housing and renewable energy lenders would see higher demand.

The SBI economists did not estimate the impact on bank profitability or loan growth. The note focused on the structural case for revision. The RBI's review is expected to conclude in the coming months.