RBI restricts urban cooperative banks from offering large loans

Mumbai: The Reserve Bank of India (RBI) on Monday restricted urban cooperative banks (UCBs) from offering large corporate loans through several changes to lending norms, after depositors lost large sums of money following the crisis at Punjab and Maharashtra Cooperative (PMC) Bank.

The regulator slashed single and connected borrower exposure for UCBs, hiked the priority sector lending (PSL) target and specified a portfolio mix for at least half of their loan books. The guidelines will be applicable from 31 March 2023.

The prudential exposure limits for UCBs for a single borrower and a group of connected borrowers were lowered to 10% and 25%, respectively, of their tier-I capital. These limits were earlier at 15% and 40%, respectively.

These are part of RBI’s draft circular on limits on exposure to single and group borrowers, large exposures and revision in PSL targets for primary UCBs. RBI said it would provide an appropriate glide path to UCBs for compliance with the norms.

“Large exposure of banks to single borrowers/parties or groups of connected borrowers/parties leads to credit concentration risk. When large exposures to a few single parties/groups become non-performing, it affects the capital/net worth of the bank concerned significantly and, at times, leads to liquidity and/or solvency risk for the bank,” said RBI.

RBI also proposed that UCBs shall have at least 50% of their portfolio comprising loans of not more than ₹25 lakh per borrower. Loans shall include all types of funded and non-funded exposures in the nature of credit.

That apart, the overall PSL target for UCBs will be increased from 40% of adjusted net bank credit at present to 75%. All UCBs will have to gradually increase their PSL target to 50% by March 2021, 60% by March 2022 and 75% by 31 March 2023.

According to RBI, credit exposures of many UCBs, particularly scheduled UCBs, predominantly comprise large ticket loans.

“Such predominance of large ticket loans in the bank’s portfolio reduces diversification of credit risk and also reduces the scope for greater financial inclusion, which is one of the main roles of UCBs. Enhancement of priority sector lending targets is also considered necessary for the purpose of meeting the larger objectives of UCBs,” said RBI.

This category of lenders came into focus on 24 September, when RBI put severe curbs on PMC Bank Ltd, including on cash withdrawals, amid a probe into accounting lapses. Cash withdrawals were capped at ₹1,000 per account for six months, but subsequently relaxed to ₹50,000 as panic spread among depositors.

The restrictions under Section 35A of the Banking Regulation Act were aimed at preventing a run on the bank that could end up endangering the stability of the entire financial system because of a contagion effect. The PMC Bank case showed how the bank had disbursed most of its loans to a single borrower group.

According to a PTI report on 29 September, erstwhile managing director of the bank, Joy Thomas, reportedly admitted to RBI that the bank’s actual exposure to the bankrupt real estate firm Housing Development and Infrastructure Ltd is more than ₹6,500 crore, a whopping 73% of its total assets of ₹8,880 crore.