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RBI Issues Fresh Guidelines For On-Lending By NBFCs

Credit to non-bank lenders has remained constrained after the IL&FS crisis in September last year.

Photographer: T. Narayan/Bloomberg
Photographer: T. Narayan/Bloomberg

The Reserve Bank of India issued fresh guidelines that would allow banks to increase their exposure to non-banking financial companies by permitting on-lending for the priority sector.

The measures were earlier announced in the statement on developmental and regulatory policies by the RBI on Aug. 7. On Tuesday, the RBI provided detailed guidelines stating that bank credit to registered NBFCs for on-lending to agriculture, housing, micro and small enterprises will be eligible for classification as priority sector up to the stipulated limit.

The key features of the regulations are:

  • While on-lending to the agriculture sector is allowed up to Rs 10 lakh per borrower, the limit for MSMEs is up to Rs 20 lakh. For housing, existing limits for on-lending has been revised from Rs 10 lakh to Rs 20 lakh per borrower.
  • The central bank also stated that the classification applies only to fresh loans sanctioned by NBFCs out of bank borrowings, on or after the date of issue of the circular. However, loans given by housing finance companies under the existing on-lending guidelines will continue to be classified under priority sector by banks, it clarified.
  • Bank credit to NBFCs for on-lending will be allowed up to a limit of 5 percent of individual bank’s total priority sector lending on an ongoing basis.
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Credit to NBFCs has remained constrained after the IL&FS crisis in September last year and disbursements by NBFCs have fallen across almost all categories. The central bank and the government have taken measures to revive credit flow. These measures include harmonising risk weights to NBFCs with those of other corporates, increasing prudential limit on bank exposure to NBFCs to 15 percent from 10 percent, bringing down minimum holding period for assets to be securitised to six months from one year and other measures to improve liquidity.

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