The Reserve Bank of India (RBI) has put forward a set of significant regulatory proposals that would tighten documentation standards for agricultural loans and revise the methodology banks use to calculate their priority sector lending (PSL) obligations. The draft directions, formally titled the Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2026, were released for public consultation, with comments invited until 26 November.

Stricter Verification for Gold-Backed Farm Loans

Among the most consequential proposals is a mandate for banks to maintain detailed records when disbursing gold-backed agricultural loans. Under the draft, lenders would be required to document the location of land under cultivation, the crops grown, and the hypothecation of crops wherever applicable. Banks would also need to ensure that sanctioned loan amounts are based on the applicable scale of finance and a proper assessment of actual credit requirements for the agricultural activity — not merely on the type or value of collateral pledged.

Notably, the draft clarifies that agricultural loans do not lose their PSL classification simply because the collateral is in the form of gold jewellery or ornaments. As the draft states: 'Bank loans extended for agricultural activities do not become ineligible for priority sector classification merely because the underlying collateral is in the form of gold jewellery or ornaments.' This addresses a longstanding ambiguity that had reportedly led some banks to either avoid or misclassify such loans.

Field Visits and Records for Landless Borrowers

The proposals also require banks to maintain records of field visits conducted by officials to verify the end use of agricultural loans — a measure aimed at curbing diversion of funds. For landless agricultural labourers and sharecroppers who lack formal land records or lease deeds, banks would need to retain alternative verifiable documents to establish eligibility for PSL classification. This provision could meaningfully expand credit access for some of India's most financially excluded farming communities.

Revised Treatment of Trade Credit Under Letters of Credit

The draft also proposes a technical but consequential change to how banks account for trade bills discounted under letters of credit (LCs) when computing PSL obligations. Currently, such bills are reportedly excluded from the net bank credit (NBC) and adjusted net bank credit (ANBC) calculations used to determine PSL targets. The RBI has proposed that bills purchased, discounted, or negotiated under LCs should no longer be excluded from these calculations.

Under the revised framework, banks may treat these exposures as interbank exposures for the limited purposes of exposure and capital adequacy calculations, while still counting them toward PSL obligations. This change has direct implications for how banks structure trade-finance portfolios and could alter the effective PSL burden for lenders with large LC-discounting books.

Why These Proposals Matter

Priority sector lending norms govern how banks allocate credit to agriculture, small businesses, housing, and other sectors deemed critical to inclusive growth. Gaps in verification have historically allowed loan diversion and inflated PSL reporting. This is not the first time the RBI has moved to tighten agricultural lending oversight — similar directives have been issued in prior years — but the current draft is notably more granular in its documentation requirements.

The proposals come at a time when agricultural credit disbursement has been a focal point of government policy, and concerns about the quality of PSL classification have drawn regulatory attention. Industry stakeholders and banking associations are expected to submit responses before the 26 November deadline, after which the RBI will finalise the directions.