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% and 25%, respectively, with an aim to prevent PMC Bank like scams caused by a large exposure to one group.
Currently, primary (urban) co-operative banks (UCBs) are permitted to have exposures up to 15% and 40% 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 totaling Rs 6,226.01 crore to Housing Development and Infrastructure Ltd (HDIL) Group companies.
Earlier this month, the RBI Central Board had reviewed the 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% and 25%, 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.