Does an NBFC loan to my MSME count as priority sector lending for the bank that funds the NBFC?
It can. When a bank lends to a registered NBFC that lends on to micro and small enterprises, the bank may count it as priority sector up to ₹20 lakh per end borrower. All such on-lending through NBFCs, housing finance companies and NCDC is capped at 5% of the bank's priority sector lending in the previous year.
The ₹20 lakh per borrower limit
Under para 23 of RBI's 2025 Directions, bank credit to registered NBFCs, other than microfinance institutions, for on-lending to micro and small enterprises counts as priority sector up to ₹20 lakh per borrower. The bank must keep borrower-level data and get an external auditor's certificate from the NBFC that no other bank has claimed the same loans.
The 5% cap
Para 25 limits all on-lending through NBFCs, housing finance companies and NCDC to 5% of the bank's total priority sector lending of the previous financial year, averaged across the four quarters of the current year.
Microfinance and co-lending
- Loans to NBFC-MFIs and other MFIs that belong to an RBI-recognised self-regulatory organisation, for on-lending to individuals and members of SHGs and JLGs, can count under MSME, subject to para 22.
- Banks may also co-lend with NBFCs to priority sectors under RBI's Transfer and Distribution of Credit Risk Directions, 2025.
Who it does not cover
The NBFC on-lending route in para 23 is not open to regional rural banks, urban co-operative banks, small finance banks or local area banks.
What it means for you
Nothing changes in your loan agreement with the NBFC. The classification sits between the bank and the NBFC, but it gives banks a reason to fund NBFCs that lend small amounts to micro and small units.
What Senseible does here
Senseible gives an NBFC and its MSME borrower the same monthly energy and emissions figures from bills, useful when the loan funds solar, efficient machines or a fuel switch.
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Last reviewed 2026-10-24.