Agriculture Sub-Target Shortfall: RIDF, PSLCs or a March Push
At the end-March review, a scheduled commercial bank's board pack shows adjusted net bank credit (ANBC) of Rs 20,000 crore; the credit equivalent of off-balance-sheet exposures is lower and so is not the relevant base. Priority sector advances total Rs 8,600 crore. Within that, agriculture is Rs 3,400 crore, small and marginal farmers Rs 1,940 crore, micro enterprises Rs 1,620 crore and weaker sections Rs 2,450 crore. An RBI inspection of PSL classification is due in the next quarter. Deposit growth is slowing and the credit-deposit ratio is 74%. Two items are worrying the compliance team: a business correspondent channel booked Rs 180 crore of loans to borrowers recorded as landless labourers and tagged them as agriculture, with no revenue or panchayat certificate on file; and Rs 300 crore lent to a non-MFI NBFC for on-lending has been tagged as agriculture on the strength of the NBFC's own certificate. The board wants to avoid depositing money with NABARD and is weighing either buying agriculture priority sector lending certificates (PSLCs) at about 1.2% of certificate value or booking fresh agriculture loans in the last fortnight of March.
1. Compute the position against each PSL target and state precisely what the shortfall triggers - who receives the money, for how long, and whether it earns any PSL credit.
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Compute each target on ANBC of Rs 20,000 crore.
| Segment | Target | Required (Rs crore) | Actual (Rs crore) | Position |
|---|---|---|---|---|
| Total PSL | 40% | 8,000 | 8,600 | Met (+600) |
| Agriculture | 18% | 3,600 | 3,400 | Short 200 |
| Small & marginal farmers | 9.5% | 1,900 | 1,940 | Met |
| Micro enterprises | 7.5% | 1,500 | 1,620 | Met |
| Weaker sections | 12% | 2,400 | 2,450 | Met |
Consequence. Only agriculture is short, by Rs 200 crore, i.e. 1% of ANBC. That amount must be deposited with NABARD's Rural Infrastructure Development Fund for five years at the notified rate, which sits well below the bank's marginal cost of funds. The deposit earns no PSL credit - it is a penalty, not an asset. Outstanding RIDF deposits also enter the ANBC computation in later years, so the denominator on which the 18% is computed grows next year.
Point to note: shortfalls in the weaker-sections target carry no such deposit requirement; they are reported and monitored. The binding failure here is agriculture alone, and it is caused by the bank's own portfolio, not by the definition.
2. Compare buying agriculture PSLCs against depositing with RIDF, using numbers. Which would you recommend and what conditions attach to the PSLC route?
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PSLC route. 1.2% x Rs 200 crore = Rs 2.40 crore, a one-time fee paid to the selling bank, and the purchased agriculture PSLC counts towards the agriculture sub-target.
RIDF route. Rs 200 crore is locked for five years. Assume the bank's marginal cost of funds is 6.50% and the notified RIDF rate is about 4.50%. The annual carrying cost is 2.00% x Rs 200 crore = Rs 4 crore, roughly Rs 20 crore over five years, plus five years of lost lending capacity on Rs 200 crore.
Recommendation. On pure cost the PSLC is about eight times cheaper and should be the first choice. But three conditions attach:
- A counterparty with surplus agriculture must actually be selling on the RBI's e-Kuber PSLC platform at that price; PSLC prices are market-determined and can spike in March when everyone is short.
- PSLCs are a one-year fix. They do not build an agriculture franchise, and the bank pays the fee again next year if the portfolio does not grow.
- The board must fund the Rs 2.40 crore through the P&L as a fee, not capitalise it.
Combination: buy PSLCs immediately to cap the exposure, and simultaneously fix the business-correspondent sourcing pipeline so next year's target is met organically. That is cheaper than RIDF and more durable than a March purchase.
3. Assess the two classification risks - the Rs 180 crore of landless-labourer loans tagged as agriculture and the Rs 300 crore of NBFC on-lending - and comment on booking fresh agriculture loans in the last fortnight of March.
Read the worked answer
Landless labourers. Loans to landless labourers and tenant farmers can qualify as agriculture, but only for agriculture and allied activity (dairy, poultry, fishery, etc.) and only with documentary evidence: for oral lessees and landless labourers, a certificate from the local revenue authority or the panchayat. Without that certificate and without evidence of the allied activity, the tag is unsupported. Expect the RBI inspection to disallow the Rs 180 crore, which turns a Rs 200 crore shortfall into Rs 380 crore and invites a supervisory observation on misreporting.
NBFC on-lending. Bank credit to an NBFC for on-lending is eligible only if the NBFC meets the prescribed eligibility criteria, the underlying loans are themselves eligible, the exposure is within the permitted limits, and the bank can verify the end-use. An NBFC's own certificate, with no loan-level data, is not adequate evidence. Ask for the on-lending portfolio data; if it is not produced, the Rs 300 crore must be removed.
March-fortnight lending. Booking fresh agriculture loans in the last two weeks purely to meet the target is window dressing. RBI's PSL audit tests genuineness: it will look at whether these loans were disbursed to real cultivators, whether the land/revenue records support them, and whether they were repaid in April. Such loans also carry high credit risk because underwriting was driven by the calendar, not the borrower.
Recommendation: reclassify the doubtful items honestly, buy PSLCs for the residual gap, and report the corrected numbers to the board.