# Does an NBFC loan to my MSME count as priority sector lending for the bank that funds the NBFC?

Canonical: https://senseible.earth/answers/nbfc-msme-loan-priority-sector-on-lending

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.

- [Do all MSME loans count as priority sector](https://senseible.earth/answers/do-all-msme-loans-count-as-priority-sector)
- [Credit guarantees for MSME green loans](https://senseible.earth/answers/credit-guarantee-for-msme-green-loans-india)
- [How TReDS invoice discounting works](https://senseible.earth/answers/how-treds-invoice-discounting-works)

Sources: [RBI, Master Directions (Priority Sector Lending, Targets and Classification) Directions, 2025, updated 11 September 2026: paras 10.2, 22, 23, 25 and 26](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12799)

Last reviewed 2026-10-24.