RBI draft priority-sector rules propose loan-level proof for bank on-lending via NBFCs

Implications for lenders

Non-bank lenders that receive bank funding tied to priority-sector targets may need to flag those loans, keep borrower-level records and keep the money deployed in eligible loans for the bank to count it. In India the draft limits such loans for micro and small enterprises to ₹20 lakh per borrower and caps each bank's use of the channel at 5% of average PSL achievement, which can limit how much of this funding banks offer to lenders outside the microfinance exemption.

Implications

Facts

Release: the RBI press release of 5 November 2026 (Press Release No. 2026-2027/1447) published separate draft PSL directions for commercial banks, small finance banks, local area banks, regional rural banks and urban co-operative banks, and invited comments on or before 26 November 2026. Instructions not carried into the consolidated drafts would be repealed when the directions are issued. The commercial bank draft says it comes into force with immediate effect, leaves its issue date blank, and keeps loans already classified under the earlier directions eligible until maturity.

Targets: for domestic commercial banks and foreign banks with twenty or more branches, the draft sets a total PSL target of 40% of ANBC or CEOBSE, whichever measure is higher. ¹ Within it, agriculture has a sub-target of 18%, ² micro enterprises 7.5% ³ and weaker sections 12%. ⁴ Micro, small and medium enterprises need Udyam registration to qualify, and retail and wholesale trade is included for limited PSL purposes.

On-lending: Section H of Chapter V says bank lending to an NBFC, housing finance company (HFC) or similar entity for on-lending is classified as PSL only when the entity has disbursed to the ultimate beneficiary and the funds "remain deployed in PSL assets". The entity must flag such loans in its systems, and the bank must collect, at a minimum, each beneficiary's name, the amount sanctioned and outstanding, the tenure, the disbursement date and the PSL category. Per ultimate borrower, loans via non-MFI NBFCs count up to ₹10 lakh per borrower for agriculture term lending ⁵ and up to ₹20 lakh per borrower for micro and small enterprises. ⁶ Banks also need auditors' certificates that the benefit has not been claimed from another bank.

Cap and exemptions: on-lending through NBFCs (including HFCs) and the National Cooperative Development Corporation may count for at most 5% of average PSL achievement, with compliance judged on the average of the four quarters of the current year. ⁷ The cap does not apply to lending to microfinance institutions that are members of an RBI-recognised self-regulatory organisation; MFIs that are not NBFC-MFIs must be such members for their loans to qualify. Banks may also meet PSL targets through co-lending arrangements and priority sector lending certificates (PSLCs); a bank may issue PSLCs without underlying assets up to 50% of previous year's PSL achievement. ⁸

Analysis

The draft changes little in what Indian banks must lend to, but more in how they may prove it when the lending runs through non-banks. Keeping the headline target at 40% of ANBC or CEOBSE and the sub-targets unchanged leaves the economics of the mandate intact. The on-lending section moves the test from the bank's loan to the NBFC to the NBFC's loan to the end borrower: the credit has to have been disbursed, has to stay in eligible assets, and has to be traceable borrower by borrower. A commentary by Vinod Kothari Consultants reads these conditions as new and links them to supervisory findings; the RBI draft itself gives no list of changes. For NBFCs that fund themselves partly through PSL-eligible bank loans, the result is a reporting and systems requirement as much as a credit one, while SRO-member microfinance lenders keep an uncapped channel.

Southeast Asia has its own directed-lending rules, built differently. In Indonesia, Bank Indonesia's macroprudential inclusive financing ratio (RPIM) asks banks to raise inclusive financing each year; under PBI 7/2026, effective 1 October 2026, a bank whose ratio was 30% or more in the previous December needs only to hold that level. ⁹ The amended Article 6 lists financing channelled via other banks, rural banks and non-bank financial institutions as routes to meet the ratio, with the explanatory notes highlighting the addition of financing via other banks, and the new Article 7A lets a bank transfer part of its RPIM fulfilment, a mechanism that resembles India's tradable PSLCs. In the Philippines, Republic Act No. 11901 of 2022 requires banks to set aside at least 25% of total loanable funds for agriculture, fisheries and rural development financing. ¹⁰

What it suggests for Southeast Asia: as Indonesia widens the routes, which include non-banks, through which banks can meet the RPIM, India's draft shows the controls a regulator may add once such channels grow: a cap on the share met through intermediaries, per-borrower limits, and loan-level evidence that the money reached eligible borrowers. Finance companies and fintech lenders in Indonesia and the Philippines that seek bank funding by offering directed-lending credit to their bank partners may face similar questions on data and tracing, whether or not their regulator writes them into rules.

Counterpoints and uncertainties

These are drafts: the comment period runs to 26 November 2026, and the final directions may change the on-lending conditions, the cap or the per-borrower limits. The draft gives no statement of what differs from the current directions, so the extent of the change for each bank depends on how much it already relies on NBFC on-lending and how it reports it today. Indonesia's RPIM and the Philippine quota rest on different legal bases, measures and penalties from India's PSL, so the comparison is about design choices, not about the size of the obligations.