Small Finance Banks receive fresh credit requests from MFIs after RBI’s PSL classification

Small Finance Banks (SFBs) are getting fresh credit requests from smaller micro-finance institutions (MFIs) for on-lending after the Reserve Bank of India in May allowed priority sector lending classification to fresh credit extended by these banks to micro-lenders. After getting the proposals from MFIs, SFBs have started the process of offering fresh credit facilities under priority sector lending (PSL).

The RBI, issuing a circular on May 5, said in view of the fresh challenges brought on by the 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, which are members of RBI- recognised Self-Regulatory Organisation of the sector and which have a gross loan portfolio of up to Rs 500 crore as on March 31, 2021, for the purpose of on-lending to individuals.

Ujjivan Small Finance Bank has received proposals from NBFC-MFIs for fresh lending. “We are in dialogue with a lot of MFIs now. But, I think we are likely to take a few calls. Cannot say how many. So far we have not disbursed any. We are likely to take some calls,” the bank’s MD & CEO Nitin Chugh told FE. “Since inception, we have been extending support to MFIs. Now, we are permitted to give fresh lending to smaller MFIs with asset-size of up to Rs 500 crore. Apart from MFIs, we have extended credit facilities to those institutions which support budding smaller MFIs. We have started the process of fresh credit facilities to MFIs under PSL and we are getting fresh credit requests from them,” ESAF Small Finance Bank said.

Notably, the PSL dispensation will be valid up to March 31, 2022. However, loans thus disbursed will continue to be classified under priority sector till the date of repayment/maturity, whichever is earlier.

According to credit rating agencies, as most small finance banks had operated as MFIs before converting into an SFB, they have a good understanding of the micro-finance space and would be in a better position to evaluate the credit profiles of the smaller MFIs to lend. And, the PSL categorisation should incentivise SFBs to on-lend to smaller MFIs, which are currently facing funding constraints following the resurgence of the second Covid wave.