Evaluate the role of NBFCs and PSL norms in shaping bank credit deployment in India.

Q. Evaluate the role of NBFCs and PSL norms in shaping bank credit deployment in India. (15 marks, 250 words)

Bank credit deployment in India is steered not by banks alone but by two structural levers — Non-Banking Financial Companies (NBFCs) as pass-through borrowers, and Priority Sector Lending (PSL) norms as a regulatory mandate. Their combined imprint underlies FY26's robust 15.9% non-food credit growth [1].

NBFCs — deepening reach, but concentrating risk - NBFCs absorb roughly 24% of SCB credit deployment [2][3], making bank lending to them a prime driver of services-sector credit, which grew 19% in FY26 — the fastest segment [1]. - Through co-lending and on-lending models (banks may count NBFC on-lending up to 5% of PSL), NBFCs extend formal credit to under-served MSMEs and last-mile borrowers [4]. - Concern: heavy bank exposure to NBFCs raises interconnectedness and concentration risk, and can channel credit toward retail and real estate over productive capex [1].

PSL norms — directing credit to policy priorities - The 40% net-bank-credit PSL mandate steers flows to agriculture (15.7% growth) and micro-small industry (33.1%) [1][3], correcting market under-provision. - PSLCs let surplus banks trade compliance, improving allocative efficiency [4]. - Concern: quota-driven lending risks evergreening and diluted appraisal if targets override borrower viability.

NBFCs widen credit's reach while PSL norms direct its purpose — together broadening India's credit base. With calibrated prudential vigilance and stronger co-lending oversight, this partnership can sustain inclusive, capex-led growth aligned with financial-stability goals.

(~245 words)

Sources: 1. PIB — SCBs Record Robust Credit Growth of 15.9% in FY 2025-26 — headline non-food credit growth; services 19%; sectoral growth rates 2. RBI — Data on Sectoral Deployment of Bank Credit — NBFC share in SCB credit deployment 3. PIB — Economic Survey 2025-26 — NBFC ~24% share; micro-small industry 33.1% credit growth 4. RBI — Priority Sector Lending: Bank Lending to NBFCs for On-Lending — co-lending/on-lending framework and PSL compliance