RBI to limit UCB’s exposure to single, group borrowers

There was also a need to enhance PSL limits for UCBs to meet the goal of financial inclusion, the RBI said.

Reserve Bank of India (RBI) plans to restrict urban cooperative banks’ (UCB) exposure to a single borrower and a group of connected borrowers at 10% and 25%, respectively, of their tier-I capital, show draft guidelines released by the central bank on Monday. At present, the limits are 15% and 40%, respectively.

The revised exposure limits shall apply to all types of fresh exposures taken by UCBs. Further, UCBs will be required to bring down their existing exposures, which are in excess of the revised limits to the stipulated levels by March 31, 2023. At the same time, where the existing exposure comprises only term loans and non-fund based facilities, while no further exposure shall be taken on such borrowers, these facilities may be allowed to continue as per their respective repayment schedule or till maturity.

The draft guidelines say that UCBs shall have at least 50% of their loan portfolio comprising loans of not more than Rs 25 lakh per borrower. The overall priority sector lending (PSL) target for UCBs will be increased from the present level of 40% of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (CEOBSE), whichever is higher, to 75%. UCBs will have to comply with the above target by March 31, 2023 in a staggered manner. UCBs shall prepare, with the approval of their boards, an action plan for compliance with the revised exposure norms and priority sector lending targets, the draft circular said.

In the draft, the regulator said that the extant single/group exposure limits of UCBs have been reviewed, revised with a view to containing concentration risk, which may spiral into liquidity or solvency risks over time. There was also a need to enhance PSL limits for UCBs to meet the goal of financial inclusion, the RBI said.

“Further, credit exposure in many urban co-operative banks, particularly scheduled/large UCBs, predominantly comprises 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,” the draft said.

The draft guidelines come in the wake of the blowout at Punjab & Maharashtra Cooperative (PMC) Bank, where the lender ran into a solvency crisis after 73% of its asset book – lent to a single entity, Housing Development & Infrastructure (HDIL) – turned bad.