Priority Sector Shortfall and the PSLC Option
At the March review, a bank's Adjusted Net Bank Credit (ANBC) is ₹20,000 crore. Outstanding priority sector lending is ₹7,200 crore, of which agriculture is ₹3,200 crore, weaker sections ₹2,000 crore, and micro enterprises ₹1,300 crore. The applicable targets are 40% of ANBC overall, 18% for agriculture, 12% for weaker sections, and 7.5% for micro enterprises. The board is considering three proposals: (i) buy ₹500 crore of priority sector lending certificates (PSLCs) in the agriculture category; (ii) subscribe to ₹400 crore of eligible securitised agriculture loans; (iii) fund ₹300 crore of new micro-enterprise loans. The compliance officer notes that PSLC purchases count towards PSL achievement but do not add to advances. The board wants to know the shortfalls, whether the proposals close them, and the risk of relying only on PSLCs.
1. Calculate the rupee shortfall against each of the four targets.
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- Overall: target = 40% of ₹20,000 crore = ₹8,000 crore. Outstanding = ₹7,200 crore. Shortfall = ₹800 crore.
- Agriculture: target = 18% of ₹20,000 crore = ₹3,600 crore. Outstanding = ₹3,200 crore. Shortfall = ₹400 crore.
- Weaker sections: target = 12% of ₹20,000 crore = ₹2,400 crore. Outstanding = ₹2,000 crore. Shortfall = ₹400 crore.
- Micro enterprises: target = 7.5% of ₹20,000 crore = ₹1,500 crore. Outstanding = ₹1,300 crore. Shortfall = ₹200 crore.
The bank is short in every category, with the largest absolute gaps in overall and agriculture. The weaker-section gap is equally large in rupee terms and should not be overlooked because the overall number looks closer to target.
2. If the bank executes proposals (i) and (iii) only, which targets are met and which remain unmet?
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Proposal (i) adds ₹500 crore of agriculture PSLC, and proposal (iii) adds ₹300 crore of micro-enterprise lending. Both count towards overall PSL achievement under the stated rule.
- Overall: ₹7,200 + ₹500 + ₹300 = ₹8,000 crore, exactly the ₹8,000 crore target. Met.
- Agriculture: ₹3,200 + ₹500 = ₹3,700 crore against ₹3,600 crore. Met.
- Micro enterprises: ₹1,300 + ₹300 = ₹1,600 crore against ₹1,500 crore. Met.
- Weaker sections: unchanged at ₹2,000 crore against ₹2,400 crore. Unmet by ₹400 crore.
So the combination closes three targets but leaves a clear weaker-section gap. The bank would still need eligible weaker-section lending, not just more agriculture PSLCs.
3. What are two risks of closing the agriculture shortfall mainly through PSLC purchases rather than direct lending?
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First, PSLC purchases are a transfer of achievement, not credit creation. They improve the reported PSL number without adding loans to farmers, so the bank's relationship network, appraisal skills, and rural outreach do not improve. If PSLC supply tightens or prices rise, the bank is exposed.
Second, there is a compliance-quality and reputational risk. PSLCs must be genuine and correctly categorised; relying on them heavily can mask weak origination and may attract supervisory attention if the bank cannot demonstrate real sectoral lending. A balanced approach would use PSLCs as a bridge while building direct agriculture and weaker-section portfolios, and would verify that any securitised loans proposed under (ii) are eligible.