To ensure continuous credit flow to the specified priority sector, the Reserve Bank has decided to allow commercial banks to lend money to NBFCs and further, allow Small Finance Banks to lend money to NBFC-MFIs on an ongoing basis vide Notification FIDD.CO.Plan.BC.No.5/04.09.01/2022-23 dated May 13th 2022. The RBI had previously circulated through notifications (dated October 8th 2021 and May 5th 2021) that banks and SFBs were to engage in lending to NBFC and NBFC-MFIs by classifying them as the priority sector. This practice was previously only supposed to be available until March 31st 2022. This facility was allowed to continue on an on-going basis in order to “ensure continuation of the synergies that have been developed between banks and NBFCs in delivering credit to the specified priority sectors,” stated the RBI.
Priority sector lending refers to delivering credit on priority to those sectors that the Government of India and RBI consider important for the essential needs of the country. Commercial banks have to lend at least 40% of their loan to the PSL category while SFBs are required to extend 75% of their Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as PSL by the Reserve Bank. Failure to meet this lending will attract penal charges. According to the RBI circular, banks would be able to fill 5% of their PSL target through this channel out of a total of 40%. In comparison, SFBs will be permitted to produce up to 10% of their PSL objective through on-lending to MFIs. To determine adherence to the prescribed cap, these limits shall be computed by averaging across four quarters of the financial year.
Furthermore, the notification stated that SFBs may lend to registered NBFC-MFIs and other MFIs with a 'gross loan portfolio' (GLP) of up to 500 crores as of March 31st of the previous fiscal year for on-lending to the priority sector. If the GLP of the NBFC-MFIs/other MFIs surpasses the specified limit at a later date, all priority sector loans created prior to exceeding the GLP limit will be categorized as PSL by the SFBs till repayment/maturity, whichever comes first.