Financial Inclusion through Priority Sector Lending: A Study on the Credit Delivery and Growth of MSMEs in India

Financial inclusion is a critical driver of inclusive economic growth, particularly in developing economies like India, where access to formal financial services remains uneven. This study examines the role of Priority Sector Lending (PSL) as a strategic tool for achieving financial inclusion and fostering the growth of Micro, Small, and Medium Enterprises (MSMEs) in India. The Reserve Bank of India (RBI) mandates Scheduled Commercial Banks (SCBs) to allocate a specific percentage of their Adjusted Net Bank Credit (ANBC) to priority sectors, including MSMEs, which are pivotal to economic development, employment generation, and poverty alleviation. This research explores the impact of bank lending under PSL on the growth of MSMEs across different sectors and regions. Using the secondary data the study provides a comprehensive assessment of the effectiveness of PSL in promoting financial inclusion for MSMEs. The findings reveal significant regional and sectoral disparities in the access to and utilization of PSL funds, highlighting the need for targeted policy interventions to address these gaps. The study also underscores the importance of supplementing PSL with non-credit support mechanisms, such as financial literacy, infrastructure development, and regulatory simplification, to enhance the overall impact on MSME growth. The insights derived from this research offer valuable recommendations for policymakers and financial institutions to optimize PSL policies, ensuring more equitable and sustainable economic growth through enhanced financial inclusion of MSMEs.