Page 46 - Banking Finance January 2020

FEATURE

RBI RESTRICTS URBAN

COOPERATIVE BANKS

FROM OFFERING LARGE

LOANS

T he Reserve Bank of India has restricted urban That apart, the overall PSL target for UCBs will be increased

cooperative banks (UCBs) from offering large
from 40% of adjusted net bank credit at present to 75%. All
UCBs will have to gradually increase their PSL target to 50%
corporate loans through several changes to
lending norms, after depositors lost large sums of
2023. According to RBI, credit exposures of many UCBs,
money following the crisis at Punjab and by March 2021, 60% by March 2022 and 75% by 31 March
Maharashtra Cooperative (PMC) Bank. particularly scheduled UCBs, predominantly comprise large
ticket loans.
The regulator slashed single and connected borrower
exposure for UCBs, hiked the priority sector lending (PSL) “Such predominance of large ticket loans in the bank’s
portfolio reduces diversification of credit risk and also
target and specified a portfolio mix for at least half of their
reduces the scope for greater financial inclusion, which is
loan books. The guidelines will be applicable from 31 March
2023. The prudential exposure limits for UCBs for a single one of the main roles of UCBs. Enhancement of priority
borrower and a group of connected borrowers were sector lending targets is also considered necessary for the
lowered to 10% and 25%, respectively, of their tier-I capital. purpose of meeting the larger objectives of UCBs," said RBI.
These limits were earlier at 15% and 40%, respectively. This category of lenders came into focus on 24 September,

when RBI put severe curbs on PMC Bank Ltd, including on
These are part of RBI’s draft circular on limits on exposure cash withdrawals, amid a probe into accounting lapses. Cash
to single and group borrowers, large exposures and revision withdrawals were capped at Rs. 1,000 per account for six
in PSL targets for primary UCBs. RBI said it would provide
months, but subsequently relaxed to Rs. 50,000 as panic
an appropriate glide path to UCBs for compliance with the
spread among depositors.
norms.
The restrictions under Section 35A of the Banking Regulation
“Large exposure of banks to single borrowers/parties or Act were aimed at preventing a run on the bank that could
groups of connected borrowers/parties leads to credit end up endangering the stability of the entire financial
concentration risk. When large exposures to a few single system because of a contagion effect. The PMC Bank case
parties/groups become non-performing, it affects the showed how the bank had disbursed most of its loans to a
capital/net worth of the bank concerned significantly and, single borrower group.
at times, leads to liquidity and/or solvency risk for the bank,"
said RBI. According to a PTI report on 29 September, erstwhile
managing director of the bank, Joy Thomas, reportedly
RBI also proposed that UCBs shall have at least 50% of their admitted to RBI that the bank’s actual exposure to the
portfolio comprising loans of not more than Rs. 25 lakh per bankrupt real estate firm Housing Development and
borrower. Loans shall include all types of funded and non- Infrastructure Ltd is more than Rs. 6,500 crore, a whopping
funded exposures in the nature of credit. 73% of its total assets of Rs. 8,880 crore.

46 | 2020 | JANUARY | BANKING FINANCE