Reckoning banks’ loans to NBFCs for on-lending to priority sectors for PSL targets

-Financial Services Division (


The Master Direction – Priority Sector Lending – Targets and Classification[1] issued by the Reserve Bank of India (RBI) mandates Scheduled Commercial Banks (SCBs) to lend a specified percentage of their Adjusted Net Bank Credit (ANBC) to the specified ‘needy’ sectors called the Priority Sectors. Further, in order to assist the banks in meeting their Priority Sector Lending targets (PSL Targets) and to extend the reach of credit to these sectors, the RBI has allowed various modes of collaboration between banks and NBFCs. One such mode is lending by banks to NBFCs and HFCs for on-lending to priority sector.

Additionally, through a notification[2] issued in 2019 the RBI provided that the loans extended by the banks to NBFCs on or before March 31, 2020 and which are on-lent to priority sector, shall be eligible to be classified as priority sector lending by the bank. However, notification imposed a cap on the ticket size of the loans originated by NBFCs and they are:

Sector Maximum ticket size of loans
Agriculture ₹ 10 lakh per borrower
Micro & Small enterprises ₹ 20 lakh per borrower
Housing (for on-lending by HFCs) ₹ 20 lakh per borrower

The maximum PSL Target that can be fulfilled by a bank using this mode is 5% of banks’ total PSL. For this purpose, on-lending done by NBFC (except MFIs) and HFCs shall be reckoned.

Considering the credit demand by these sectors classified as ‘priority’ and the outreach of NBFCs, the RBI has issued another notification dated March 23, 2020[3], extending the above mentioned time limit to cover originations during FY 2020-21. Accordingly, the loans originated by banks on or before March 31, 2021 and extended to NBFCs for on-lending to Priority Sectors shall be eligible to be classified under Priority Sector Lending of such bank.

It is noteworthy that since lending to HFCs and NBFC-MFIs by banks for on-lending was already covered under the Master Directions on Priority Sector Lending and there was no time limit provided for such loans under the Master Directions, the provisions of the aforesaid notification relating to the time limit of eligibility shall not be applicable on such bank credit. The time limit applies only for on-lending to agriculture sector and micro & small enterprises.






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