What changed
RBI mandated that bank loans to HFCs for on-lending to individuals must have a tenor aligned with the average portfolio maturity of the HFC's housing loans up to ₹20 lakh. Previously, some banks were classifying short-term loans (6-12 months) as priority sector, which RBI disallows if the tenor mismatch exists. The 5% cap on such priority sector lending was part of the special dispensation applicable up to March 31, 2010.
What it means for you
Banks could no longer use short-term loans to HFCs to meet priority sector targets unless the loan tenor matched the HFC's average housing loan maturity, as per the 2009 circular. This tightened compliance and may have reduced the volume of such loans classified as priority sector. Lenders must monitor end-use and tenor alignment to avoid classification issues.
What you must do
- Review all existing loans to HFCs classified as priority sector and ensure their tenor matches the HFC's average portfolio maturity of housing loans up to ₹20 lakh.
- Update internal policies to require tenor alignment documentation from HFCs before sanctioning priority sector loans.
- Implement end-use monitoring mechanisms to verify that funds are used strictly for on-lending to individuals for housing up to ₹20 lakh per unit.
- Communicate these changes to controlling offices and branches for immediate implementation.
Who it affects
All scheduled commercial banks (excluding RRBs) as of 2009, Housing Finance Companies (HFCs) approved by NHB, Priority sector lending teams, Credit and risk management departments
What happens if a bank's loan to an HFC has a shorter tenor than the HFC's average housing loan maturity?
Such loans will not be eligible for classification under priority sector. Banks must ensure the loan tenor is co-terminus with the average portfolio maturity of the HFC's housing loans up to ₹20 lakh, as per the 2009 circular.
Does the 5% cap on priority sector lending through HFCs still apply?
The 5% cap was part of the special dispensation applicable up to March 31, 2010, as per the 2009 circular. Current applicability should be verified with updated RBI guidelines.
Is this circular applicable to Regional Rural Banks?
No, the circular is addressed to all scheduled commercial banks excluding Regional Rural Banks.