RBI Proposes To Tighten Lending Limit Of Urban Cooperative Banks
The revised lending limits will apply to all fresh exposures taken by urban cooperative banks, the central bank says.
In the aftermath of the PMC Bank crisis, the Reserve Bank of India proposed to lower the lending limit of urban cooperative banks.
An urban cooperative bank’s exposure limits will be revised to 10 percent and 25 percent of its Tier-I capital for single borrower/party and a group of connected borrowers/parties, respectively, RBI said in a draft circular released on Monday. That compares with the existing limits of up to 15 percent and 40 percent for a single borrower and a group of borrowers, respectively.
The revised limits, the RBI said, would apply to all fresh exposures taken by urban cooperative banks. They will also have to lower their existing exposures in excess of the revised limits by March 31, 2023, according to the central bank, which has invited comments on the draft circular.
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 circular said.
Besides, RBI said urban cooperative banks should have at least 50 percent of their loan portfolio comprising loans of not more than Rs 25 lakh per borrower. It revised the priority sector lending target for urban cooperative banks from 40 percent to 75 percent of the adjusted net bank credit or credit equivalent amount of off-balance sheet exposure.
That’s because large exposure of banks to single borrowers or groups of connected borrowers, according to the RBI, leads to credit concentration risk. When large exposures to a few single parties become non-performing, it affects the capital of the bank concerned and, at times, leads to liquidity or solvency risk for the bank.
The central bank’s move comes about three months after it was found that nearly three-fourths of Punjab & Maharashtra Cooperative Bank’s exposure was in Housing Development & Infrastructure Ltd.—a scam-hit infrastructure company whose directors Rakesh and Sarang Wadhawan were arrested by the Economic Offenses Wing of Mumbai Police in the PMC Bank case.