Money & Banking

Banks’ lending to NBFCs: RBI may extend validity of circular

K Ram Kumar Mumbai | Updated on February 20, 2020 Published on February 20, 2020

The RBI may extend the validity of its circular that allows banks’ lending to non-banking finance companies (NBFCs), which on-lend to specific segments — agriculture, micro and small enterprises (MSEs) and housing — to be classified as priority sector lending (PSL) beyond March-end.

The reason: By doing so, banks will be encouraged to keep the funding tap open for NBFCs to meet their PSL target. And NBFCs (especially the mid- and small-size ones) can use the funds, which became tough to mobilise after the IL&FS and DHFL debt default crisis, to originate fresh loans and stay in business.

Banks are staring at a steep agriculture credit (disbursement) target of ₹15-lakh crore in FY21, as outlined in the Budget.

The Budget did not specify any agriculture credit target. Against the agriculture credit target of ₹11-lakh crore for FY19, banks actually disbursed about ₹12.50-lakh crore.

Win-win proposition

The extension of the validity of the circular by, say a year, could be a win-win proposition for both banks and NBFCs, say industry experts.

While the larger NBFCs, which are either standalone or have the backing of a strong corporate/ financial institution, are able to get bank loans without any hitch; the mid- and smaller-size NBFCs are still finding the going tough as banks have turned conservative.

The circular on lending by banks to NBFCs (other than micro finance institutions) for on-lending to specified segments within PSL — agriculture, MSEs and housing — was issued on August 13, 2019. The instructions contained in the circular are valid up to March 31, 2020 and are slated for review thereafter.

PSL includes loans given to segments such as agriculture; micro, small and medium enterprises; export credit; education; housing; social infrastructure; renewable energy. Banks are required to meet the statutory PSL target of 40 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher. Experts opined that the RBI may also relax the stipulation in the circular that restricts bank credit to NBFCs for on-lending to 5 per cent of an individual bank’s total PSL on an ongoing basis.

Umesh Revankar, MD & CEO, Shriram Transport Finance Company, said: “In the last six months, the RBI has opened up one more avenue for banks to achieve their priority sector lending — lending by them to NBFCs for on-lending to the agriculture, MSEs and housing is classified as PSL. This was not available earlier.

“However, this has been restricted to 5 per cent of their PSL target. That means on total lending, it will be only 2 per cent.”

Published on February 20, 2020
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