Money & Banking

Banks allowed to buy loans from NBFCs to meet priority sector target

| Updated on: Jul 02, 2011

RBI move will help finance firms get loans at lower rates

The Reserve Bank of India allowing banks to buy loans from Non-Banking Finance Companies to meet their priority sector target has come as a relief to NBFCs.

On May 3, the RBI, in its mid-term Monetary Policy, stated that banks lending to NBFCs for financing commercial vehicles would no longer be considered as ‘priority sector' lending.

Banks with fewer branches, which did not have the reach to meet the mandatory lending target, either gave loans to NBFCs that in turn lent to ‘priority sectors' and these were counted as priority sector lending in the books of the banks. Sometimes NBFCs lent to the priority sectors with their own funds, and then sold the loans to banks, which were also counted as ‘priority sector' lending by banks.

The RBI effectively stopped this to force banks to lend to the priority sector directly, rather than through NBFCs.

As banks scrambled to fund NBFCs' priority sector lending for meeting their own obligations, NBFCs got bank loans cheaper. But the RBI move eliminated this ‘concessional rate of interest' on bank loans to NBFCs.

Now, the RBI has said that while loans given by banks to NBFCs for the purpose of on-lending to the priority sectors would still not be counted to meet banks' mandatory lending obligations, loans bought from NBFCs would.

Mr T.T. Srinivasa Raghavan, Managing Director, Sundaram Finance, said it ought to be appreciated that “this is less of an NBFC issue and more a financial inclusion issue”.

Most importantly, the transport operators already reeling under the pressure of higher vehicle prices, higher diesel prices and higher interest rates would have been further squeezed, he said.

Sundaram Finance, with a total portfolio of Rs 12,000 crore, sold Rs 750 crore to banks last year.

Mr R. Sridhar, Managing Director, Shriram Transport Finance, said it is a welcome clarification for banks, NBFCs and small road transport operators. Shriram Transport Finance sold about Rs 10,000 crore worth of loans to banks out of the total loans of Rs 36,000 crore in 2010-11.

Published on March 12, 2018

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you