Current · Source: Reserve Bank of India · RBI/2021-22/27 · issued 05 May 2021 · ~2 min read
Quick answerRBI now allows Small Finance Banks to classify fresh on-lending to small NBFC-MFIs (loan portfolio up to ₹500 crore) as Priority Sector Lending, up to 10% of their total PSL portfolio, until March 31, 2022.
The rule, in the simplest words
Small Finance Banks can now count loans they give to small microfinance companies (NBFC-MFIs) as 'Priority Sector Lending' (a special category that helps poor people get loans).
Only microfinance companies with a total loan amount of ₹500 crore or less as of March 31, 2021, and who are part of an RBI-approved group (SRO), qualify.
These special loans cannot be more than 10% of the bank's total Priority Sector Lending portfolio as of March 31, 2021.
The bank must give these loans before March 31, 2022, but once given, they stay as Priority Sector Lending until the loan is fully paid back.
How it plays out — a real example
An agri & priority-sector lending officer in Indore, Priya, finds a small NBFC-MFI with a loan portfolio of ₹300 crore as of March 31, 2021, and it is a member of an RBI-recognized SRO. She approves a fresh on-lending of ₹2 crore to this MFI, ensuring it does not exceed 10% of her bank's total PSL portfolio. This helps the MFI lend to poor borrowers in her district, and Priya classifies the loan under PSL, boosting her bank's compliance.
What changed
Previously, on-lending by SFBs to MFIs did not qualify for PSL classification. Now, fresh credit extended to registered NBFC-MFIs and other MFIs (members of an RBI-recognised SRO) with a gross loan portfolio up to ₹500 crore as on March 31, 2021, will be eligible for PSL classification. This dispensation is valid until March 31, 2022, and such loans retain PSL status until repayment or maturity.
What it means for you
SFBs can now boost their PSL compliance by lending to smaller MFIs, addressing liquidity gaps in the microfinance sector post-COVID. The 10% cap ensures focused support without overexposure. Banks must still follow existing on-lending conditions from the Master Directions on PSL.
What you must do
Identify eligible NBFC-MFIs and other MFIs with gross loan portfolio ≤ ₹500 crore as on March 31, 2021, and membership in an RBI-recognised SRO.
Ensure fresh on-lending to these entities does not exceed 10% of your total priority sector portfolio as on March 31, 2021.
Classify such loans under PSL and maintain documentation for compliance with para 21 of the Master Directions on PSL (September 4, 2020).
Monitor the validity period: disbursements must be made by March 31, 2022, but loans retain PSL status until repayment/maturity.
Who it affects
Small Finance Banks, NBFC-MFIs with loan portfolio up to ₹500 crore, Other MFIs (Societies, Trusts) that are SRO members, Microfinance borrowers (end-users)
❓ Common questions
Can SFBs classify existing on-lending to MFIs under this dispensation?
No, only fresh credit extended after the circular date (May 5, 2021) qualifies for PSL classification under this scheme.
What happens if an MFI's loan portfolio exceeds ₹500 crore after March 31, 2021?
The eligibility is based on the gross loan portfolio as on March 31, 2021. Subsequent growth does not disqualify the MFI for loans already extended, but new loans may not qualify if the portfolio crosses the threshold.
Is there a cap on the total amount SFBs can lend under this facility?
Yes, the aggregate of such on-lending cannot exceed 10% of the bank's total priority sector portfolio as on March 31, 2021.
📜 Read the original circular — full text as issued by RBI
RBI/2021-22/27
FIDD.CO.Plan.BC.No.10/04.09.01/2021-22
May 5, 2021
The Chairman/ Managing Director
Chief Executive Officer
Small Finance Banks
Dear Sir/Madam,
Priority Sector Lending (PSL) - On-lending by Small Finance Banks (SFBs) to NBFC-MFIs
As per extant guidelines, lending by Small Finance Banks (SFBs) to Micro-Finance Institutions (MFIs) for on-lending is not reckoned for priority sector lending (PSL) classification. In view of the fresh challenges brought on by the COVID-19 pandemic and to address the emergent liquidity position of smaller MFIs, it has been decided to allow PSL classification to the fresh credit extended by SFBs to registered NBFC-MFIs and other MFIs (Societies, Trusts etc.) which are members of RBI recognised ‘Self-Regulatory Organisation’ of the sector and which have a ‘gross loan portfolio’ of upto ₹500 crore as on 31 March 2021, for the purpose of on-lending to individuals. Bank credit as above will be permitted up to 10% of the bank’s total priority sector portfolio as on 31 March, 2021.
2. The above dispensation shall be valid upto March 31, 2022. However, loans thus disbursed will continue to be classified under Priority Sector till the date of repayment/maturity whichever is earlier. Further, banks will be required to adhere to the conditions prescribed for on-lending under para 21 of our Master Directions on PSL dated September 4, 2020 (updated as on April 29, 2021).
3. The guidelines shall come into effect from the date of the issuance of this circular.
Yours faithfully
(Sonali Sen Gupta)
Chief General Manager-in-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2021-22/27 · issued 05 May 2021. The plain-English explanation above is BankPulse’s own independent summary.
Example: if you are a Compliance officer at a bank this circular applies to (Small Finance Banks, NBFC-MFIs with loan portfolio up to ₹500 crore, Other MFIs (Societies, Trusts) that are SRO members, Microfinance borrowers (end-users)), your first concrete step on “PSL On-lending by SFBs to NBFC-MFIs: COVID Relief” is: “Identify eligible NBFC-MFIs and other MFIs with gross loan portfolio ≤ ₹500 crore as on March 31, 2021, and membership in an RBI-recognised SRO.” (RBI issued this 05 May 2021).
Circular: RBI/2021-22/27 -- PSL On-lending by SFBs to NBFC-MFIs: COVID Relief
Issued: 05 May 2021
Action required: Identify eligible NBFC-MFIs and other MFIs with gross loan portfolio ≤ ₹500 crore as on March 31, 2021, and membership in an RBI-recognised SRO.
Action required: Ensure fresh on-lending to these entities does not exceed 10% of your total priority sector portfolio as on March 31, 2021.
Action required: Classify such loans under PSL and maintain documentation for compliance with para 21 of the Master Directions on PSL (September 4, 2020).
Action required: Monitor the validity period: disbursements must be made by March 31, 2022, but loans retain PSL status until repayment/maturity.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12081&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
Help us keep this accurate
Found an inaccuracy or have an improvement? Tell us. Every report is reviewed by our team before any change is made — nothing goes live unverified.
Public beta — plain-English informational summaries. Always verify against the official RBI source (circular number cited on every page) before making compliance, credit, treasury, audit, or operational decisions. · Join our WhatsApp channel ↗
BANKPULSE · FREE DAILY BRIEF
Get RBI updates for your role
Every important RBI update, decoded in plain English — for your career, exams & financial awareness.
We collect only your email, name and role, used solely to send your brief — never sold or shared. Withdraw anytime via the unsubscribe link in any email. Independent platform, not affiliated with the RBI. Information, not legal advice.
REPORT AN ERROR · BETA
Spotted an error? Earn 500 BankPulse Credits
Help us stay accurate. If your correction is verified true and approved by our founder, you earn 500 BankPulse Credits — redeemable when the platform monetises.
Reviewed by a human before any credit is awarded. We never change the site from crowd input without verification.
WANT A NEW FEATURE · BETA
What would make BankPulse more useful for you?
Tell us what to build next — a tool, a data view, a role page, anything. We read every suggestion.
Thank you — your ideas directly shape what we build.