RBI Makes Bank-NBFC Priority Sector Lending Permanent
Current · Source: Reserve Bank of India · RBI/2022-23/50 · issued 13 May 2022 · ~2 min read
Quick answerRBI has permanently allowed commercial banks to lend to NBFCs for priority sector on-lending, removing the March 2022 sunset. Banks face a 5% PSL cap; SFBs get a 10% cap for NBFC-MFIs. This stabilizes a key credit channel.
The rule, in the simplest words
Banks can now permanently lend money to NBFCs (non-bank finance companies) so those NBFCs can give loans to farmers, small businesses, and poor people (priority sectors).
There is a limit: a commercial bank can only use up to 5% of its total priority sector loans for this kind of lending to NBFCs.
Small Finance Banks (SFBs) can lend up to 10% of their priority sector loans to NBFC-MFIs (microfinance companies) for the same purpose.
SFBs can only lend to NBFC-MFIs that have a total loan portfolio (all loans they have given out) of ₹500 crore or less as of last March 31.
The limit is checked by averaging the bank's lending over four quarters (three-month periods) of the financial year.
How it plays out — a real example
An agri & priority-sector lending officer in Indore, Priya, is planning her bank's priority sector lending for the year. She knows the RBI has made the NBFC on-lending rule permanent, so she can now sign a long-term deal with a local NBFC that lends to small farmers. She checks that her bank's total lending to NBFCs for on-lending stays under 5% of all its priority sector loans, averaged over four quarters, and feels relieved she no longer has to worry about a deadline expiring.
What changed
Previously, bank lending to NBFCs for on-lending to priority sectors was a temporary facility set to expire on March 31, 2022. RBI has now made this facility permanent, effective from May 13, 2022. The caps remain: 5% of a commercial bank's total PSL and 10% for SFBs lending to NBFC-MFIs, calculated on a four-quarter average basis.
What it means for you
Banks can now plan long-term partnerships with NBFCs for priority sector credit without worrying about regulatory expiry. The 5% cap ensures this channel remains a supplement, not a substitute, for direct lending. For SFBs, the 10% cap and the ₹500 crore GLP limit on NBFC-MFIs provide a clear, stable framework for microfinance on-lending.
What you must do
Update internal PSL policies to reflect the permanent status of NBFC on-lending facility.
Monitor your bank's four-quarter average exposure to NBFCs for on-lending to ensure it stays within the 5% (commercial banks) or 10% (SFBs) cap.
For SFBs, verify that NBFC-MFI partners have a gross loan portfolio not exceeding ₹500 crore as of the previous March 31.
Review existing NBFC partnerships and consider expanding them within the cap to meet PSL targets efficiently.
Who it affects
All Scheduled Commercial Banks (excluding RRBs, UCBs, LABs), Small Finance Banks (SFBs), NBFCs and HFCs receiving on-lending from banks, NBFC-MFIs and other MFIs (Societies, Trusts) borrowing from SFBs
❓ Common questions
Regulatory timeline
Stated effective dateeffective from May 13, 2022
Decoded by BankPulse2026-06-18 06:10 IST
Built from our lineage records — each fact carries its provenance; missing history simply is not shown (never guessed).
What is the cap for commercial banks lending to NBFCs for priority sector on-lending?
The overall limit is 5% of the individual bank's total priority sector lending, calculated as a four-quarter average.
Can SFBs lend to any NBFC-MFI under this facility?
No, SFBs can only lend to registered NBFC-MFIs and other MFIs that are members of an RBI-recognized Self-Regulatory Organisation and have a gross loan portfolio of up to ₹500 crore as on March 31 of the previous financial year.
What happens if an NBFC-MFI's GLP exceeds ₹500 crore after receiving a loan from an SFB?
All priority sector loans created before the GLP limit was exceeded will continue to be classified as PSL by the SFB until repayment or maturity.
📜 Read the original circular — full text as issued by RBI
RBI/2022-23/50
FIDD.CO.Plan.BC.No.5/04.09.01/2022-23
May 13, 2022
The Chairman/ Managing Director/
Chief Executive Officer
All Scheduled Commercial Banks (Including Small Finance Banks)
(Excluding Regional Rural Banks, Urban Co-operative Banks and Local Area Banks)
Dear Sir/Madam,
Lending by Commercial Banks to NBFCs and Small Finance Banks (SFBs) to NBFC-MFIs, for the purpose of on-lending to priority sectors
Please refer to para nos. 21.2, 21.3, 22 and 24 of the Master Directions on Priority Sector Lending dated September 4, 2020 (updated from time to time), along with notifications FIDD.CO.Plan. BC.No.15/04.09.01/2021-22 dated October 8, 2021 and FIDD.CO.Plan.BC.No.10/04.09.01/2021-22 dated May 5, 2021 wherein lending by commercial banks to NBFCs and lending by Small Finance Banks (SFBs) to NBFC-MFIs, for the purpose of on-lending to certain priority sectors, was permitted up to March 31, 2022.
2. To ensure continuation of the synergies that have been developed between banks and NBFCs in delivering credit to the specified priority sectors, it has been decided to allow the above facility on an on-going basis.
3. Bank credit to NBFCs (including HFCs) for on-lending will be allowed up to an overall limit of 5 percent of an individual bank’s total priority sector lending in case of commercial banks. In case of SFBs, credit to NBFC-MFIs and other MFIs (Societies, Trusts, etc.) which are members of RBI recognized ‘Self-Regulatory Organisation’ of the sector, will be allowed up to an overall limit of 10 percent of an individual bank’s total priority sector lending. These limits shall be computed by averaging across four quarters of the financial year, to determine adherence to the prescribed cap.
4. SFBs are allowed to lend to registered NBFC-MFIs and other MFIs which have a ‘gross loan portfolio’ (GLP) of up to ₹500 crore as on March 31 of the previous financial year, for the purpose of on-lending to priority sector. In case the GLP of the NBFC-MFIs/other MFIs exceeds the stipulated limit at a later date, all priority sector loans created prior to exceeding the GLP limit will continue to be classified by the SFBs as PSL till repayment/maturity, whichever is earlier.
Yours faithfully,
(Sonali Sen Gupta)
Chief General Manager-in-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2022-23/50 · issued 13 May 2022. 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 (All Scheduled Commercial Banks (excluding RRBs, UCBs, LABs), Small Finance Banks (SFBs), NBFCs and HFCs receiving on-lending from banks, NBFC-MFIs and other MFIs (Societies, Trusts) borrowing from SFBs), your first concrete step on “RBI Makes Bank-NBFC Priority Sector Lending Permanent” is: “Update internal PSL policies to reflect the permanent status of NBFC on-lending facility.” (RBI issued this 13 May 2022).
Circular: RBI/2022-23/50 -- RBI Makes Bank-NBFC Priority Sector Lending Permanent
Issued: 13 May 2022
Action required: Update internal PSL policies to reflect the permanent status of NBFC on-lending facility.
Action required: Monitor your bank's four-quarter average exposure to NBFCs for on-lending to ensure it stays within the 5% (commercial banks) or 10% (SFBs) cap.
Action required: For SFBs, verify that NBFC-MFI partners have a gross loan portfolio not exceeding ₹500 crore as of the previous March 31.
Action required: Review existing NBFC partnerships and consider expanding them within the cap to meet PSL targets efficiently.
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.
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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=12317&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.
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