The Reserve Bank of India (RBI) on Monday proposed that the single and group borrower limits of urban cooperative banks (UCBs) should be brought down and half the loans given should not be of more than Rs 25 lakh, while the priority sector lending targets should be raised steeply.
UCBs’ target for priority-sector lending has been proposed at 75 per cent of their credit from 40 per cent now. The target has to be reached in phases — 50 per cent by March 2021, 60 per cent by March 2022, and 75 per cent by March 2023.
The RBI proposed that the single and group borrower limits should be 10 per cent and 25 per cent, respectively, of a bank’s tier-1 capital.
At present, UCBs are allowed to have exposures of up to 15 per cent and 40 per cent of their capital funds to a single borrower and a group of borrowers, respectively.
Urban cooperative bankers said the draft norms were similar to those prescribed for small finance banks (SFBs). These norms, if they become rules, will hamper the growth of cooperatives, they said. The move seems to be to push UCBs to become SFBs, they said.
Vidyadhar Anaskar, chairman, Maharashtra Urban Cooperative Banks Federation, said the norms would help in risk mitigation and strengthen the sector. However, there are two aspects that needed a relook. First, the exposure per borrower to Rs 25 lakh is too small. Small traders with a banking facility have higher volumes, so the need is for a higher amount. The limit should be raised to at least Rs 50 lakh, he said. Second, he said the priority sector requirement of 75 per cent was too high.
Jyotindra Mehta, president of the National Federation of Urban Cooperative Banks and Credit Societies, said banks would abide by the regulations. The federation will send representations after having discussions with members. Comments on the draft circular can be sent to the RBI by January 20.
The RBI said the norms would save UCBs from concentration risk and focus on their larger agenda of financial inclusion, for which they were created.
The revised exposure limits will apply to all types of fresh exposures taken by UCBs. At least half the loan book of a UCB should comprise loans, both funded and non-funded, of not more than Rs 25 lakh per borrower. The existing UCBs should align their loan book to reflect these by March 31, 2023. “Loans” for the purpose will include all types of funded and non-funded exposures in the nature of credit. If the exposure is in the case of term loans, or non-fund based, it can continue till the end of its repayment period, or maturity, the RBI’s draft circular said.
Tier-1 capital is the core capital of a bank, while capital funds comprise paid-up capital and free reserves. Exposure includes both funded and non-funded credit limits and underwriting and similar commitments.
In its draft circular, the RBI said the large exposure of banks to a single borrower or groups of connected borrowers led 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/or solvency risk for the bank,” the draft circular said.
The central bank sought to bring down large-ticket loans in UCBs as 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 UCBs should have a board approval action plan for compliance with the revised exposure norms and priority-sector lending targets, the RBI said, adding the banks should establish an appropriate mechanism to regularly monitor the progress made under the action plan.