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RBI Extends Priority Sector Tag For Bank Loans To NBFCs For FY21

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RBI Extends Priority Sector Tag For Bank Loans To NBFCs For FY21
Himali Patel - 24 March 2020

The Reserve Bank of India (RBI) recently proposed that the bank loans to registered Non-Banking Financial Companies (NBFCs) other than Micro Finance Institution (MFIs) for on-lending will be eligible for classification as a priority sector under respective categories up to March 31, 2020. “Accordingly, after undertaking a review, it has been decided to extend the priority sector classification for bank loans to NBFCs for on-lending for FY 2020-21. Further existing loans disbursed under the on-lending model will continue to be classified under priority sector till the date of repayment or maturity,” says RBI in its circular. The RBI has also allowed bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending to be allowed up to an overall limit of 5 per cent, of individual bank’s total priority sector lending.
Banks are expected to compute the eligible portfolio under an on-lending mechanism by way of averaging four quarters to determine adherence to the prescribed cap. As per market experts, this move will ease the liquidity constraint and cost of funding for the beleaguered NBFC sector. “Given that the NBFC sector was at the forefront for lending to small and medium enterprises (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. However, in the near term, the bigger problem is demand destruction. The government may also have to come up with some fiscal stimulus to support sectors that have been hit hard, like hospitality, tourism, airlines, consumer discretionary and real estate,” says Rajani Sinha, Chief Economist and National Director - Research at Knight Frank India.
Having said that, the initiative has been taken by the RBI to infuse liquidity in the system without any further delay. “It is crucial to monitor the changing financial market conditions which will help in administering any need for additional liquidity support required to ensure normal functioning of the bank. This initiative comes as a ray of hope for micro, small and medium enterprises (MSMEs) and housing finance companies amidst the ongoing mayhem of COVID-19. However, a further repo rate cut will ensure more liquidity into the system that will in-turn support the economy during COVID-19,” says Rohit Poddar, Managing Director, Poddar Housing and Development and Joint Secretary, NAREDCO Maharashtra.

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