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Priority Sector On-Lending by NBFC

Varun Hariharan

| Updated: Mar 26, 2020 | Category: NBFC, RBI Notification

Priority sector On-Lending by NBFC

The Reserve Bank of India issued a notification on 23rd March 2020 regarding the Priority Sector on-Lending by NBFC.  This circular will cover the extension of time for the Priority Sector On-lending by NBFC for the financial year 2020-21.

Prior to the above circular, the Master Direction on Priority Sector Lending- Targets and Classification provides that all the scheduled banks lend a percentage of Adjusted Net Bank Credit (ANBC) for certain sectors. These sectors are considered as priority sectors for which credit requirement is crucial.  Banks have been collaborating with NBFC to meet the requirements of on-lending processes to priority sectors.

In an earlier circular FIDD.CO.Plan.BC.07/04.09.01/2019-20 published on August 13, 2019, the main consideration for Priority Sector On-Lending to NBFC is to boost the credit which is provided to borrowers. Loans provided by banks on or before March 2020 for On-Lending by an NBFC would be considered as priority sector lending. One of the main aims of the circular was that Bank loans should be provided to registered NBFC (other than Micro Finance Institutions) to be lent to priority sectors. In view of increased use by the priority sector, this initiative has been taken.

For the purposes of the Priority Sector On-Lending by NBFC, the amount of loan sanctioned is as follows:

  1. Agriculture: NBFC on-lending for ‘Term lending’ component under Agriculture shall be allowed to INR 10 Lakhs per borrower.
  2. Micro & Small enterprises: On- lending by an NBFC will be allowed to only INR 20 Lakhs per borrower.
  3. Housing: Existing Limits have been enhanced for Housing Finance Companies (HFCs) from INR 10 Lakhs per Borrower to Rs 20 Lakhs per Borrower.

After an analysis conducted by the Reserve Bank of India (RBI), it has considered extending the classification for the purposes of on-lending by NBFC for Priority Sector to the financial year 2020-21.  Loans which are provided earlier will be continued to be termed as priority sector classification till the date of maturity or repayment.

Reasons for Credit Requirement for Priority sector on-lending by NBFC

The Reserve Bank of India has considered that priority sector on-lending by NBFC is crucial due to the fact that NBFCs have more active participation in priority sectors such as agricultural-based activities, housing finance activities and Micro and Small Enterprises.

As NBFCs concentrate more of their businesses and activities on rural areas, the RBI has extended the credit which banks will provide to NBFCs for the purposes of on-lending to priority sectors. With the previous notification issued on August 2019, the RBI has increased the time limit to cover credit obligations in the financial year 2020-21.

Priority Sector includes the following:

  • Agriculture Based and Activities which are incidental to Agricultural Purposes
  • Micro and Small Based Enterprises- Any business which is considered under this category will be a priority sector
  • Housing – Loans for the purposes of Housing is also categorised as housing.

Bank loans for Priority sector On- Lending by an NBFC will be allowed up to five per cent of individual bank’s total priority sector lending practices on an ongoing basis. The new model considers that banks can classify fresh loans which are given to NBFCs as out of bank borrowings. This decision will be valid till 31st March 2020 but will be considered for review. Previous loans which are disbursed will be considered as priority sector until the period of maturity or the date of repayment of the loan.


In the previous circulars issued in 2019, the Reserve Bank of India has mandated that priority sector lending is crucial for the development of the economy. Reserve Bank has allowed banks to collaborate with NBFCs for Priority Sector On- lending. Through this process, easy credit would be available to Agriculture, Micro and Small Scale Enterprises and Housing. However, the RBI has extended the priority sector on-lending by NBFCs. This would not only cover priority sector lending in the financial year 2020-21 but previously disbursed loans will also come within the ambit of priority till the period of maturity or the repayment. Finally, banks loan provided for priority sector on-lending by NBFC will be considered at five per cent of the total bank priority classification.

For the official notification in this regard, please refer below the link:


Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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