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Business News/ Industry / Banking/  To avoid PMC-like scams, RBI proposes to tighten lending norms for urban co-operative banks
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To avoid PMC-like scams, RBI proposes to tighten lending norms for urban co-operative banks

RBI on Monday proposed reduction in loan amount an urban co-operative bank can lend to a single entity and a group of borrowers to 10% and 25%, respectively
  • In a draft circular, the RBI said large exposure of banks to single borrowers/parties or groups of connected borrowers/parties leads to credit concentration risk
  • (Photo: Reuters)Premium
    (Photo: Reuters)

    Mumbai: The RBI on Monday proposed reduction in loan amount an urban co-operative bank can lend to a single entity and a group of borrowers to 10 per cent and 25 per cent, respectively, with an aim to prevent PMC Bank like scams caused by large exposure to one group.

    Currently, primary (urban) co-operative banks (UCBs) are permitted to have exposures up to 15 per cent and 40 per cent of their capital funds to a single borrower and a group of borrowers, respectively.

    Punjab and Maharashtra Co-operative (PMC) Bank collapsed because of its huge exposure totalling 6,226.01 crore to Housing Development and Infrastructure Ltd (HDIL) Group companies.

    Earlier this month, the RBI Central Board had reviewed functioning of the urban cooperative banks and the enforcement framework.

    In a draft circular, the RBI said 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 concerned bank significantly and, at times, leads to liquidity and solvency risk for the lender.

    "Keeping in view the above aspects, the extant single/group exposure limits of UCBs have been reviewed and it has been decided to rationalize the single/group exposure limits for UCBs with a view to containing the concentration risk," the draft said on which the RBI had sought comments till January 20.

    The RBI now proposes that the prudential exposure limits for UCBs for a single borrower/party and a group of connected borrowers/parties should henceforth be 10 per cent and 25 per cent, respectively, of their Tier-I capital.

    The revised exposure limits shall apply to all types of fresh exposures taken by UCBs, it said.

    Also once the proposal comes into force, UCBs will have to bring down their existing exposures, which are in excess, within the aforesaid revised limits by March 31, 2023.

    The draft also suggests that UCBs should have at least 50 per cent of their loan portfolio comprising loans of not more than 25 lakh per borrower/party.

    Further, it proposes to increase the overall priority sector lending (PSL) target for UCBs from the present level of 40 per cent of adjusted net bank credit (ANBC) to 75 per cent.

    Following exposure of scam in the PMC Bank, which had over 9.15 lakh depositors, the RBI had imposed restrictions on withdrawals.

    Statutory inspection of PMC by the RBI had revealed large group exposure toward Housing Development and Infrastructure Ltd (HDIL) Group companies to the tune of about 6,226.01 crore (inclusive of interest accrued in the related accounts).

    Out of the total exposure of 6,226.01 crore at the end of March 2019 to the HDIL group, only 439.58 crore was disclosed to the RBI and remaining 5,786.43 crore remained undisclosed.

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    This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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    Published: 30 Dec 2019, 10:01 PM IST
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