Urban Co-Op Banks Told To Unwind Peer Deposits

The Reserve Bank of India (RBI) has prohibited urban co-operative banks (UCBs) from parking deposits with other UCBs except for maintaining balances in current accounts for meeting their clearing and remittance requirements.

It has directed UCBs maintaining funds in the form of fixed deposits or term deposits with other UCBs to unwind the outstanding deposits by June end.

This move by the apex bank comes in the wake of realisation that investment of funds by UCBs as deposits with other institutions and UCBs could pose systemic risk and can affect the depositing banks' financials in the event of any financial problem afflicting the deposit-accepting bank.

This directive comes at a time when nearly 160 co-operative banks in Gujarat have their deposits stuck in the Madhavpura Mercantile Cooperative Bank (MMCB). These banks had collectively placed deposits amounting to about Rs 600 crore with MMCB.

RBI has directed scheduled UCBs and non-scheduled UCBs to increase the proportion of investments that can be maintained in government and other approved securities by March-end 2002.

Scheduled UCBs, as part of their statutory liquidity ratio (SLR) requirements, have to invest atleast 20 per cent of their net time and demand liabilities (NDTL) in government and other approved securities now against 15 per cent earlier.

In the case of non-scheduled UCBs with NDTL of Rs 25 crore and above, this limit has been hiked to 15 per cent (10 per cent earlier) while for those with NDTL of less than Rs 25 crore, it has been pegged at 10 per cent as against no requirement for investment in these securities earlier.

RBI said that all scheduled UCBs, with effect from April 01, 2003, shall maintain their entire SLR assets of 25.0 per cent of NDTL only in government and other approved securities.

All the scheduled UCBs and non-scheduled UCBs with NDTL of Rs 25 crore and above would, henceforth, be required to maintain investments in government securities only in Securities General Ledger (SGL) accounts with RBI or in constituent SGL accounts of public sector banks and primary dealers. Non-scheduled UCBs with NDTL of less than Rs 25 crore may maintain government securities in physical or scrip form.