What changed
Previously, bank loans to MFIs for on-lending qualified as priority sector only if at least 75% of the MFI's total loans were for income-generating activities. The RBI has now lowered this threshold to 70%, effective from June 27, 2013. All other conditions from the July 20, 2012 circular remain unchanged.
What it means for you
Banks can now classify a larger portion of their lending to MFIs as priority sector advances, as the compliance bar for MFIs has been lowered. This may encourage banks to increase credit flow to MFIs, especially those serving lower-income segments, while still ensuring a majority of MFI lending is for productive purposes.
What you must do
- Update internal PSL classification policies to reflect the new 70% income-generation threshold for MFI on-lending.
- Review existing MFI partner portfolios to identify loans that now qualify as priority sector under the relaxed norm.
- Communicate the revised criterion to credit and risk teams handling MFI exposures.
- Ensure all other conditions from the July 2012 circular remain in compliance.
Who it affects
All scheduled commercial banks (excluding RRBs), Microfinance institutions (MFIs) seeking bank funding, Bank credit and priority sector lending teams
Does this change apply to all MFI loans or only new ones?
The circular does not specify a cut-off date for existing loans. Banks should apply the revised 70% threshold to all MFI on-lending facilities for priority sector classification from the circular date.
What other conditions from the July 2012 circular remain unchanged?
All other guidelines in paragraph VIII of the July 20, 2012 circular, including definitions and eligibility criteria for MFI on-lending, continue to apply.