Lending by Banks to NBFCs for On-lending to Priority Sectors: Recent RBI Guidelines and Way Forward

ABSTRACT

The Reserve Bank of India (RBI) has allowed Scheduled Commercial Banks (SCBs) and Small Finance Banks (SFBs)to lend money to NonBanking Finance Companies (NBFCs) and Micro Finance Institutions (NBFC-MFIs) respectively for the purpose of on-lending to the priority sectors. As per the Master Directions of RBI on Priority Sector Lending the facility was allowed till March 31,2022. However, the circular issued by the RBI on May 13,2022 makes this facility to continue on an ongoing basis. The article gives a background for the facility, discusses few related questions and suggesting a way forward. The authors opine that there is synergy between banks and NBFCs and lending for on-lending creates a win-win for all the stakeholders. They also recommend that the banks shall engage NBFCs and NBFC-MFIs as channel partners for reaching out to the priority sectors.