Priority Sector Shortfall, an NBFC and a Cost Decision
Sanjay Nagari Sahakari Bank has adjusted net bank credit (ANBC) of Rs 600 crore. Its priority sector lending (PSL) at year-end is: agriculture Rs 90 crore, MSME Rs 160 crore, housing Rs 50 crore, education Rs 25 crore, and other eligible categories Rs 65 crore. Weaker-section lending within this is Rs 55 crore. The bank's PSL target is 75% of ANBC. It has a pipeline proposal for a Rs 25 crore term loan to a sugar mill and a Rs 10 crore loan to a non-banking financial company (NBFC) for on-lending to micro-enterprises. The branch head wants to count the NBFC loan as PSL because the end-use is micro-enterprise lending. The bank is also considering purchasing priority sector lending certificates (PSLCs) at 0.40% or depositing the shortfall in the Rural Infrastructure Development Fund (RIDF). The board wants to meet the target without overstating PSL.
1. Compute the PSL shortfall and assess whether the NBFC loan can be counted as PSL.
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Add only eligible categories and do not double-count weaker sections, which are a sub-set of PSL. Eligible PSL is Rs 90 + 160 + 50 + 25 + 65 = Rs 390 crore. The target is 75% of Rs 600 crore = Rs 450 crore. The shortfall is Rs 60 crore, or 10% of ANBC; achievement is 65%. The weaker-section figure of Rs 55 crore is relevant for the weaker-section target but is not added again.
The Rs 10 crore NBFC loan is not automatically PSL. On-lending to micro-enterprises can qualify only if the NBFC meets the RBI's eligibility conditions, the bank has a proper agreement on end-use and reporting, and the loan is not to a large NBFC excluded from the scheme. The bank must be able to identify the ultimate borrowers and verify that the on-lending is to eligible micro-enterprises. The sugar mill loan is not PSL merely because it is in a rural area. The branch should not book either loan as PSL until eligibility is documented. Counting ineligible loans would misstate the bank's PSL return and attract regulatory adverse comment.
2. Compare buying PSLCs with depositing the shortfall in RIDF and recommend a course of action.
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PSLC purchase transfers the shortfall to another bank and gives immediate PSL credit. At 0.40%, the cost of covering Rs 60 crore is about Rs 24 lakh. The bank must also consider the liquidity and capital impact, but the cost is explicit and predictable. An RIDF deposit also covers the shortfall, but it locks up funds at a below-market return, creates an opportunity cost, and is generally a residual option. The bank should compare the RIDF yield with its alternative deployment yield and with the PSLC price, and choose the cheaper option after adjusting for liquidity.
The recommendation should be a combination: buy PSLCs only for the irreducible shortfall, while building genuine PSL assets in agriculture, micro-enterprises and weaker sections. The bank should not rely permanently on certificates, because they are a balancing instrument, not a substitute for a PSL business strategy. The NBFC loan may be sanctioned if it is commercially sound, but it should be counted only after eligibility is established. The board should approve a quarterly PSL plan with sector-wise targets and a cap on the cost of PSLC purchases.
3. What monitoring and reporting controls should the board put in place?
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The board should adopt a written PSL policy covering eligible categories, weaker-section targets, the treatment of NBFC on-lending, and the use of PSLCs and RIDF. Monthly reports should show ANBC, eligible PSL, shortfall, sector-wise achievement, and the cost of certificates. The bank should reconcile the PSL return with the loan system and verify end-use for on-lending and agriculture loans. Internal audit should test a sample of accounts for eligibility and double-counting.
The board should also ensure that the sugar mill loan is not dressed up as PSL and that staff incentives do not reward misclassification. The annual report should disclose PSL achievement and the amount of PSLCs purchased. If the bank has a persistent shortfall, the board should review its branch mix, product design and credit processes, not just buy certificates near year-end. This protects the bank from regulatory penalties and from the reputational risk of window dressing.