Priority Sector Lending Position of a Rural Branch
A domestic scheduled commercial bank's rural branch has adjusted net bank credit (ANBC) of ₹800 crore as on 31 March 2025. Its outstanding priority sector advances are: agriculture ₹110 crore, of which loans to small and marginal farmers are ₹52 crore; micro enterprises ₹38 crore; education loans ₹15 crore; housing loans to economically weaker sections ₹12 crore; and renewable energy ₹5 crore. All these are eligible to be classified under priority sector lending. The branch also has ₹20 crore of advances that are currently classified as non-priority but are eligible under the weaker sections category. The branch manager must report the position against the overall PSL target, the agriculture target, the small and marginal farmer sub-target and the micro enterprise sub-target. The bank uses the standard 40% overall PSL norm and the prescribed sub-targets for domestic commercial banks.
1. Compute the overall PSL target and the shortfall or surplus for the branch.
Read the worked answer
Overall PSL target = 40% of ANBC = 0.40 × ₹800 crore = ₹320 crore.
Current eligible PSL = agriculture 110 + micro enterprises 38 + education 15 + EWS housing 12 + renewable energy 5 = ₹180 crore.
Shortfall = 320 − 180 = ₹140 crore.
The branch is at 180 / 800 = 22.5% of ANBC against the 40% target. This is a substantial shortfall, not a marginal one.
2. Compute the agriculture target, the small and marginal farmer target and the micro enterprise target, and the shortfall in each.
Read the worked answer
- Agriculture target: 18% of ₹800 crore = ₹144 crore. Current agriculture = ₹110 crore. Shortfall = 144 − 110 = ₹34 crore.
- Small and marginal farmers (SMF): 10% of ₹800 crore = ₹80 crore. Current SMF = ₹52 crore. Shortfall = 80 − 52 = ₹28 crore. SMF is a sub-set within agriculture, so the ₹28 crore shortfall is part of, not additional to, the agriculture shortfall.
- Micro enterprises: 7.5% of ₹800 crore = ₹60 crore. Current micro enterprises = ₹38 crore. Shortfall = 60 − 38 = ₹22 crore. This is within the overall PSL, not an extra amount on top of the ₹140 crore overall shortfall.
A common error is to add all the sub-target shortfalls to the overall shortfall. That would double-count because agriculture, SMF and micro enterprises are components of PSL.
3. The manager proposes to reclassify the ₹20 crore of eligible weaker-section advances as PSL and claim that the overall shortfall is largely resolved. Assess this proposal.
Read the worked answer
Reclassification adds ₹20 crore to PSL: 180 + 20 = ₹200 crore. The overall shortfall becomes 320 − 200 = ₹120 crore, and the PSL ratio becomes 200 / 800 = 25%. That is not 'largely resolved'; the branch would still be 15 percentage points below the 40% target.
More importantly, weaker sections is a sub-target within PSL, not a substitute for the overall target or for the agriculture, SMF and micro enterprise sub-targets. Reclassifying existing eligible loans may correct a reporting error, but it does not create new credit flow. The branch still needs roughly ₹120 crore of additional eligible PSL, including at least ₹34 crore in agriculture, ₹28 crore in SMF and ₹22 crore in micro enterprises, while avoiding double counting. The manager should verify eligibility before reclassification and then plan fresh lending rather than present a relabeling exercise as target achievement.