Priority Sector Lending – Lending by banks to NBFCs for On-Lending

25 Mar, 2020 Manoj Nadkarni

Reserve Bank of India (RBI), vide Circular dated August 13, 2019 advised that bank loans to registered NBFCs (other than MFIs) for on-lending to specific sectors will be eligible for classification as priority sector under respective categories up to March 31, 2020 and will be reviewed thereafter.

RBI has now announced on March 23, 2020 that bank credit to registered NBFCs towards agriculture, MSMEs and housing sector up to prescribed limits(overall limit of five percent of individual bank’s total priority sector lending arrived at by averaging across four quarters, to determine adherence to the prescribed cap.)will continue to be treated as priority sector loans for a year starting April. This is expected to ease liquidity constraints for the real estate sector.

‘Priority sector’ tag for bank lending to NBFC sector for on-lending purpose will ease the liquidity constraint and cost of funding for the beleaguered NBFC sector. Given that NBFC sector was in forefront for lending to SMEs, the move will also provide relief to the SME sector that has been hit hard by the ongoing economic turmoil. Easing of liquidity for NBFCs will also help the real estate sector. The move will enable faster dissemination and disbursal of housing loans, as NBFC’s as well as banks would be disbursing these more aggressively given that these would qualify as priority sector lending.

Real estate developers also welcomed the move and was long-awaited demand from Confederation of Real Estate Developers Association of India as the real estate sector supports more than 300 industries.

The menace of this pandemic has particularly hit at a very sensitive time. RBI’s latest move in the wake of the ongoing pandemic will bring in some respite and as such help increase credit disbursement in these three sectors. However, it is also a fact that the Covid-19 scare and increasing lockdowns across cities have dented demand and supply within the housing sector. The complete lockdown not only impacts new launches and housing sales but will eventually create other big issues – with construction activity severely hit across cities, project deliveries will be delayed therefore, it may not see as much traction of such interventions as could have been expected in less dire times. However, if they sustain into the eventual recovery phase, they can generate considerable forward momentum.

Bank credit to registered NBFCs (other than MFIs) for on-lending is eligible for classification as priority sector under respective categories subject to the following conditions:

i. Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture up to ₹ 10 lakh per borrower.

ii. Micro & Small enterprises: On-lending by NBFC allowed up to ₹ 20 lakh per borrower.

iii. Housing: on-lending by HFCs up to ₹ 20 lakh per borrower.