Year-end priority sector shortfalls at Ganga SFB
Ganga Small Finance Bank's priority sector target for the year is 75% of an ANBC of ₹8,400 crore, i.e. ₹6,300 crore. At the start of the last month of the financial year, its certified PSL outstanding is ₹6,120 crore (72.9%). Total advances are ₹8,360 crore, of which loans of ₹25 lakh and below are ₹3,940 crore (47.1%), against the requirement that at least 50% of total loans be loans up to ₹25 lakh. The treasury has quotes for priority sector lending certificates: general category at 0.45%, agriculture at 0.60% and micro enterprise at 1.35%, the last with thin availability. The alternative for a shortfall is a one-year deposit with NABARD's RIDF, which returns about 3.5% against a marginal cost of funds of 7.9%. The business head proposes to sanction ₹180 crore of new loans in the last fortnight, to borrowers seeking tickets of ₹26–28 lakh, saying this will 'fix the ratio'.
1. Compute the year-end PSL and sub-target shortfalls, and recommend the cheapest compliant way to close what can be closed, showing the arithmetic.
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Shortfalls. Overall PSL: 75% of ₹8,400 crore = ₹6,300 crore, against ₹6,120 crore outstanding, a gap of ₹180 crore. Sub-target: 50% of total advances of ₹8,360 crore = ₹4,180 crore, against ₹3,940 crore, a gap of ₹240 crore.
Cost comparison for the ₹180 crore PSL gap.
- RIDF: the opportunity loss is 7.9% − 3.5% = 4.4% on ₹180 crore, i.e. about ₹7.9 crore for the year.
- PSLC (general): 0.45% of ₹180 crore = ₹0.81 crore.
- PSLC (micro enterprise): 1.35% of ₹240 crore = ₹3.24 crore, and this also lifts overall PSL to ₹6,360 crore, above the ₹6,300 crore target, closing both gaps in one trade.
The judgement call. PSLC and RIDF fix the 75% target because they are recognised as priority sector assets. The 50% test, however, is a test of the composition of the bank's own loan book - the proportion of advances in tickets of ₹25 lakh or less - and neither a certificate nor a RIDF deposit changes that book. So the ₹240 crore composition gap must be closed by genuine small-ticket lending, or by purchasing a qualifying portfolio through direct assignment or securitisation before the cut-off date.
Recommendation. Buy ₹240 crore of micro enterprise PSLC if available (cost ₹3.24 crore, a fraction of the RIDF loss); simultaneously approach two or three originators for a direct assignment of qualifying ≤₹25 lakh loans to close the composition gap. If the purchased portfolio cannot be settled in time, record the sub-target shortfall in a board note with a quarter-wise glide path rather than pretending PSLC has cured it. Sanctioning ₹180 crore of ₹26–28 lakh tickets in the last fortnight is the worst option: it dilutes the sub-target further.
2. Evaluate the business head's proposal to disburse ₹180 crore in ₹26–28 lakh tickets in the last fortnight.
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The proposal fails on every count.
It worsens the sub-target. The test is a ratio: loans of ₹25 lakh and below divided by total advances. Adding ₹180 crore of ₹26–28 lakh loans raises the denominator to ₹8,540 crore without raising the numerator. The required micro book rises to ₹4,270 crore and the shortfall widens from ₹240 crore to ₹330 crore. The proposal 'fixes' nothing.
It does not reliably help the headline PSL number either. Classification has to be tested against the eligibility criteria for each category; a ₹26–28 lakh loan is not automatically priority sector merely because the borrower is small, and any portion that does qualify will not change the fact that the composition test is breached.
It creates credit risk at the worst moment. Loans of ₹26–28 lakh sanctioned in a fortnight to meet a ratio will be underwritten to a deadline, not to a credit standard; seasoned bankers call this 'year-end paper'. Such loans typically show delinquency at 12–18 months, precisely when the bank will be presenting its numbers to the supervisor.
It is a governance failure. A target-driven disbursal sprint in the final fortnight of the year invites audit qualification and, if detected, a supervisory observation on window dressing.
Alternative. Grow the ≤₹25 lakh book steadily through the year with a branch-level ratio limit reported monthly to the board, so that the composition test is managed continuously. If a gap must be closed at year-end, close it with a purchased portfolio of already-seasoned qualifying loans, which is transparent and disclosed.
3. The treasurer suggests buying PSLCs on 31 March and selling them back in the first week of April. Advise the board.
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This is a compliance-versus-substance question, and the board should say no.
It may be technically permissible and still be wrong. PSLCs are tradable instruments and a bank may buy and later sell them. Nothing in the trading rules forbids a round trip. But the arrangement has no purpose other than to manufacture a 31 March ratio, and a supervisor or statutory auditor who sees a purchase on the last day of the year and a matching sale seven days later is entitled to infer intent.
Consequences. At minimum, the bank's PSL certificate becomes a document the auditor will not sign without qualification. More seriously, year-end window dressing is treated as a supervisory concern about the reliability of the bank's reported data, which is a far larger problem than a ₹180 crore shortfall, particularly if the bank is anywhere near a licence transition application or a raising of capital.
The accounting also has a cost. A PSLC sale in April reduces next year's PSL position, so the bank simply transfers the shortfall forward, and it pays the bid-offer spread twice for the privilege.
What the board should approve. A written PSL policy that states the target, the sub-target, the monthly monitoring format, the permitted instruments (organic lending, direct assignment, PSLC purchase) and the conditions for each. If a year-end purchase is genuinely needed to remain compliant, buy in January or February, hold the certificate, and disclose the purchase in the notes. That is the same transaction done for a defensible reason - compliance ahead of the cut-off - rather than a cosmetic one.