Priority-Sector Shortfall: RIDF Versus PSLC Purchase
A bank's board is reviewing priority-sector performance. The bank's adjusted net bank credit (ANBC) is ₹12,000 crore. Actual priority-sector lending is ₹4,320 crore, of which agriculture is ₹1,980 crore and micro enterprises ₹810 crore. Weaker-section lending is ₹1,500 crore. The compliance team notes the overall PSL target is 40% of ANBC, the agriculture sub-target is 18%, the micro-enterprise sub-target is 7.5%, and the weaker-section target is 12%. The bank has two broad options for any shortfall: contribute to the Rural Infrastructure Development Fund (RIDF) or buy priority-sector lending certificates (PSLCs). The treasurer favours RIDF because it is simple; the credit head favours PSLCs because they preserve lending relationships. The board asks for a quantified shortfall analysis and a recommendation.
1. Compute the overall, agriculture, micro-enterprise and weaker-section shortfalls or surpluses.
Read the worked answer
Overall PSL target = 40% × ₹12,000 crore = ₹4,800 crore. Actual PSL = ₹4,320 crore, so the overall shortfall = ₹480 crore, equal to 4.0% of ANBC. Agriculture target = 18% × ₹12,000 crore = ₹2,160 crore. Actual agriculture = ₹1,980 crore, so the agriculture shortfall = ₹180 crore. Micro-enterprise target = 7.5% × ₹12,000 crore = ₹900 crore. Actual micro-enterprise lending = ₹810 crore, so the micro shortfall = ₹90 crore. Weaker-section target = 12% × ₹12,000 crore = ₹1,440 crore. Actual weaker-section lending = ₹1,500 crore, so there is a surplus of ₹60 crore.
These sub-targets sit within the overall 40% target; they are not additional to it. The weaker-section surplus does not automatically cure the agriculture or micro-enterprise shortfalls.
2. Evaluate RIDF contribution versus PSLC purchase for this bank. Which would you recommend and why?
Read the worked answer
RIDF is administratively simple and can address the overall PSL shortfall, but it typically offers a lower return than direct lending and does not create agriculture or micro-enterprise exposure. It may not cure category-specific sub-target shortfalls. PSLCs are more targeted because certificates can be bought for agriculture, micro enterprises or general PSL categories; they preserve the bank's customer relationships in the sense that the bank does not have to push unsuitable loans. However, PSLCs carry a market price and eligibility conditions, and buying them does not build the bank's own origination capability.
The practical recommendation is a split: use category-specific PSLCs first for the ₹180 crore agriculture and ₹90 crore micro-enterprise shortfalls if available at a reasonable price, and use RIDF for the residual overall shortfall after those purchases. The board should compare all-in cost, liquidity impact and the risk of relying on a thin PSLC market; the weaker-section surplus should not be used to justify ignoring the other sub-targets.
3. If the bank contributes ₹480 crore to RIDF, does it fully solve the problem? Explain.
Read the worked answer
No. A ₹480 crore RIDF contribution may close the overall PSL gap if the contribution is eligible and counted for that purpose, but it does not by itself close the agriculture and micro-enterprise sub-target gaps. The bank would still be short ₹180 crore in agriculture and ₹90 crore in micro enterprises unless it originates eligible loans or buys category-specific PSLCs. The weaker-section position is already a surplus, so it is not the issue.
The board should therefore ask two separate questions: whether the overall 40% target is met after the RIDF contribution, and whether each sub-target is independently met. Compliance should confirm the current RBI and NABARD treatment of RIDF and PSLCs before the contribution is booked.