The Reserve Bank has revised the priority sector lending eligibility for housing loans vide its Master Directions on Priority Sector Lending, 2025. As a prospective home loan borrower, how does it affect you?
What is Priority Sector Lending?
Priority Sector Lending (PSL) is an RBI policy to encourage banks to lend to certain key sections of the economy where the banks would be otherwise hesitant to lend to. This hesitation may be because of the risk in doling out such loans. Such sectors include affordable housing, MSME, agriculture, education, renewable energy, social infrastructure etc.
The Reserve Bank has set certain targets for priority sector lending that the banks must meet. To incentivize banks, the risk weights for such loans is lower compared to other loans. This reduces capital requirements for the banks.
In this post, we discuss the recent change in PSL criteria for housing loans.
Which Houses Are Eligible for Priority Sector Lending for Banks?
As per the latest Master Directions on Priority Sector Lending, 2025, the following houses meet the priority sector lending criteria.
#1 Loans for purchase/construction of house
| Category | Loan Limit* (Rs lacs) | Maximum Cost of Dwelling Unit* (Rs lacs) |
| Centres with population of 50 lacs and above | 50 | 63 |
| Centres with population of 10 lacs and above but below 50 lacs | 45 | 57 |
| Centres with population below 10 lacs | 35 | 44 |
| *Both criteria must be met for priority sector lending. For instance, for a house bought in a centre with population greater than 50 lacs, the cost of house must not exceed 63 lacs, and the loan must also not exceed 50 lacs. | ||
#2 Loans for repairs to damaged dwelling units
| Category | Loan Limit* (Rs. Lacs) | Maximum Cost of Dwelling Unit* (Rs. Lacs) |
| Centres with population of 50 lacs and above | 15 | 63 |
| Centres with population of 10 lacs and above but below 50 lacs | 12 | 57 |
| Centres with population below 10 lacs | 10 | 44 |
| *Both criteria must be met | ||
#3 Bank loans for affordable housing projects using at least 50% of FAR/FSI for houses with carpet area of not more than 60 sq. meters (~645 sq. feet).
Earlier, the home loans up to Rs 35 lacs (cost of house up to Rs 45 lacs) and up to Rs 25 lacs (house cost up to Rs 30 lacs) would qualify under priority sector lending. Further, loans to repair damaged houses, up to Rs 10 lacs in metros and Rs 6 lacs otherwise, would also qualify. Hence, you can see the Reserve Bank has widened the eligibility net, both in terms of loan amount and the cost of house.
How Does This Affect You?
Not directly. The banks have priority sector lending targets and this is eligibility criteria for which home will qualify as priority sector lending.
Home loans are not the only way through which the banks can meet their priority sector lending targets. Certain agriculture loans, loans to MSMEs, export credit, education loans (up to 25 lacs), social infrastructure, renewable energy, and few others also qualify. Of course, even loans to these sectors will also have eligibility criteria.
Hence, depending on credit comfort, the banks may choose to give more credit to any of these sectors. Further, in case of any shortfall in meeting these targets, the bank can loan money to various Government agencies such as NABARD, SIDBI, NHB etc. These Government agencies lend these amounts to priority sectors as intended. To discourage banks from just lending money to these agencies, these agencies borrow at relatively low rates. The banks can also bridge the deficit by buying Priority sector lending certificates (PSLCs) from banks that have exceeded their priority sector lending targets.
By tweaking the criteria for priority sector housing, the Reserve Bank wants to do the following:
- Widen the eligibility by increasing the cost and loan amount. This is necessary if the real estate prices have gone up.
- Nudge banks to lend to affordable housing. PSL loans have lower risk-weight requirements, reducing the capital requirements for such loans. Technically, this should allow banks to make PSL housing loans at lower rates.
However, whether this translates to lower interest rates for borrowers whose houses fit the bill remains to be seen. The bank websites do not show different rates for PSL housing loans and regular housing loans.
Unlike a repo rate cut that quickly translates into lower home loan interest rates (at least for existing borrowers), there is no such direct relief to borrowers due to this revision in priority sector lending criterion. RBI is only encouraging banks to lend to low-cost housing and hopefully at lower rates.
Note that, depending on your income levels, family structure, and the size of the house, you may also be eligible for interest subsidy under Pradhan Mantri Awaas Yojana (PMAY). Now, not every house is eligible for interest subsidy under PMAY. You can read more details about the scheme here.