Breather For Urban Co-Ops

The apex bank has indicated that it is not out to kill the urban co-operative banks, it only wants them to do business along prudential lines

Responding positively to several representations made by urban co-operative banks (UCBs), the RBI has allowed these banks to grant loans to individuals against security of shares, albeit with some riders.

Industry observers, however, point out that UCBs will have to tread cautiously in this regard as most of them do not have the requisite expertise in tracking the day-to-day movements in stock markets.

In April, in the light of the Madhavpura Mercantile Co-operative Bank episode, the central bank had advised UCBs not to entertain any fresh proposals for lending directly or indirectly against the security of shares, either to individuals or to any other entity.

 

The RBI said loans against shares and debentures should be limited up to Rs 5 lakh if the securities are in physical form and Rs 10 lakh if they are in dematerialised form.

It further said the loans can be granted to individuals to meet contingencies and personal needs or for subscribing to rights or new issues of shares/ debentures or for purchases in secondary equity market.

It added that aggregate of all such loans should be within the overall ceiling of 20 per cent of the owned funds of the bank and a margin of 40 per cent should be maintained in all cases of such loans.

However, senior bankers from the co-operative sector said, as most UCBs do not have the wherewithal to monitor stock market movements, it would be preferable for the RBI to prescribe higher margins of 60 per cent to 70 per cent as against the prescribed 40 per cent. Such a prudent move will give the cooperative banks additional cushion against any adverse share price movements.

The central bank has called upon UCBs to put in place a risk management system before venturing out into loans against shares.

These banks should also have an audit committee of their boards of directors, which should oversee all approved loan proposals once in every two months.

The management and audit committees should ensure all loans against shares are made only to those individuals who are not in any way connected with any stock-broking activity or entity, the RBI cautioned.

Softpedalling on SLR

The Reserve Bank of India (RBI) today relaxed the timeframe set for urban co-operative banks (UCBs) to achieve a higher proportion of their statutory liquidity ratio (SLR) holding in the form of government and other approved securities as a percentage of their net demand and time liabilities (NDTL).

This step by the central bank comes in the wake of difficulties, in the current market conditions, being faced by the smaller UCBs in adhering to the prescribed time schedule.

According to the RBI