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The Reserve Bank of Indian has decided to allow the classification of priority sector lending for loans given by small finance banks (SFB) to micro-finance institutions (MFI) for on-lending to individuals.

The decision has been taken to address the liquidity issues of MFIs amid the severe Covid crisis.

During a virtual address on Wednesday, RBI Governor Shaktikanta Das said: "In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to Rs 500 crore) for on-lending to individual borrowers as priority sector lending."

This facility will be available up to March 31, 2022.

At present, lending by Small Finance Banks (SFBs) to Micro Finance Institutions (MFIs) for on-lending is not reckoned for priority sector lending (PSL) classification.

Bank credit will be permitted up to 10 per cent of the bank's total priority sector portfolio as on March 31, 2021, said an RBI circular.

Loans disbursed under the scheme will continue to be classified under priority sector till the date of repayment or maturity whichever is earlier.