The Reserve Bank of India (“RBI”), by way of Master Directions on Priority Sector Lending dated September 4, 2020 (updated from time to time) along with notifications dated May 5, 2021 and October 8, 2021, permitted lending by Small Finance Banks (“SFBs”) to Non-Banking Financial Companies - Micro Finance Institutions (“NBFC-MFIs”) and commercial banks to Non-Banking Financial Companies (“NBFCs”), for the purpose of on-lending to certain priority sectors up to March 31, 2022.

RBI has now allowed the above facility on an on-going basis subject to the following limits which shall be computed by averaging across four quarters of the financial year:

1. credit by commercial banks to NBFCs (including housing finance companies) - 5% (five percent) of the concerned bank’s total priority sector lending; and
2. credit by SFBs to NBFC-MFIs and other micro finance institutions (societies, trusts, etc.) (“MFIs”) which are members of RBI recognized ‘Self Regulatory Organisation’ of the sector - 10% (ten percent) of the concerned bank’s total priority sector lending.

Further, SFBs have been allowed to lend to registered NBFC-MFIs and other MFIs, which have a gross loan portfolio (“GLP”) of up to Rs. 500,00,00,000 (Rupees five hundred crore) as on March 31 of the preceding financial year, for the purpose of on-lending to priority sector. In case the GLP of the NBFC-MFIs or other MFIs exceeds the stipulated limit then all priority sector loans extended prior to such date will continue to be classified as priority sector lending by the SFBs till repayment/ maturity, whichever is earlier.

Please find a copy of the notification issued by RBI in this regard, here.

This update has been contributed by Aastha (Partner) and Aditi Singh Kashyap (Associate).

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