Closing a Priority Sector Shortfall
A branch of a scheduled commercial bank must close the year with priority sector lending (PSL) at 40% of its adjusted net bank credit (ANBC), which stands at Rs.500 crore on the reporting date. PSL outstanding in its books is Rs.176 crore. Three options are on the table. Option A: buy PSLC-General certificates for the entire shortfall at 45 paise per Rs.100 of face value. Option B: place the shortfall amount in RIDF with NABARD for one year, earning 4.5%. Option C: originate fresh direct agri-allied loans to dairy SHGs at 9.5%; the branch's marginal cost of funds is 6.2% and expected credit cost on this portfolio is 1.2%, but the two trained officers can place the full amount only over four months, so the loans would earn for eight months of the year. The branch's sub-target for small and marginal farmers is separately short, and a PSLC-General purchase does not repair that line. The board wants a one-year fix that does not worsen next year's position.
1. Compute the PSL shortfall and compare the one-year cost of Options A and B.
Read the worked answer
Requirement. 40% of ANBC = 40% × Rs.500 crore = Rs.200 crore. Shortfall. Rs.200 crore − Rs.176 crore = Rs.24 crore.
Option A - PSLC-General. Price is quoted in paise per Rs.100 of face value, so 45 paise per Rs.100 = 0.45% of face value. Cost = 0.45% × Rs.24 crore = Rs.10,80,000. This is a clean expense: no asset is created and nothing is recoverable.
Option B - RIDF deposit. Rs.24 crore is locked for a year at 4.5% while the funds cost 6.2%. Annual opportunity loss = (6.2% − 4.5%) × Rs.24 crore = 1.7% × Rs.24 crore = Rs.40,80,000.
Comparison. Option A is Rs.40,80,000 − Rs.10,80,000 = Rs.30,00,000 cheaper, and it does not tie up cash for twelve months. On pure cost, Option A dominates Option B completely; RIDF only makes sense where PSLC supply is unavailable in the required category.
2. Evaluate Option C against A and recommend an action plan for the reporting date.
Read the worked answer
Option C economics. Net margin = 9.5% − 6.2% (funds) − 1.2% (credit cost) = 2.1%. Because origination takes four months, the portfolio earns for only 8 of 12 months: Gain = 2.1% × 8/12 × Rs.24 crore = Rs.33,60,000.
Against Option A's cost of Rs.10,80,000, Option C is better by roughly Rs.22,80,000, and it leaves a performing asset instead of an expense.
But timing decides the answer. C cannot be on the books on the reporting date, and a shortfall on the reporting date is a compliance breach, not a pricing choice. Recommendation: buy PSLC-General for the full Rs.24 crore now to close the gap (Rs.10.8 lakh, the cheapest one-day instrument), and run Option C on a parallel track so that the asset stock rises before the next reporting date. Reject Option B - it is the most expensive and adds no asset.
Flag for the board: PSLCs are issued in separate categories (general, agriculture, small and marginal farmer, micro enterprise). A PSLC-General purchase fixes the overall 40% number but leaves the small and marginal farmer sub-target short; that line needs PSLC-SMF or fresh SMF lending.
3. Next year ANBC is projected at Rs.560 crore. Recompute the position assuming Option C is fully delivered, and explain what it implies for the choice made this year.
Read the worked answer
Next year's requirement. 40% × Rs.560 crore = Rs.224 crore. Projected PSL stock. Rs.176 crore + Rs.24 crore (Option C delivered) = Rs.200 crore. Shortfall next year = Rs.224 crore − Rs.200 crore = Rs.24 crore - exactly the same figure as this year.
Implication. The book grew, so the target grew faster than the asset: a 40% requirement on incremental ANBC of Rs.60 crore demands Rs.24 crore of fresh PSL just to stand still. A pure PSLC or RIDF approach resets the same problem every year and converts a one-time expense into a recurring one, with no growth in the loan book.
The judgement is therefore not "cheapest option wins" but "cheapest option now, plus capacity built for later". The branch should treat the PSLC purchase as a bridge instrument priced at Rs.10.8 lakh a year, and set an origination target above Rs.24 crore for the coming year (say Rs.30 crore) so that the stock outruns the ANBC growth rather than merely matching it.