MUMBAI, Dec 31: In an effort to avoid frauds like the one seen in PMC Bank, the Reserve Bank of India on Monday proposed to tighten lending rules for urban co-operative banks. The regulator plans to limit these lenders' exposure to a single partyand a group of related borrowers to 10 per cent and 25per cent, respectively, of their Tier I capital - down from the 15per cent and 40per cent level now.
The RBI also proposes to broaden the borrower base of UCBs as the new rules would specify that at least 50 per cent of the loan portfolio of these lenders should comprise advances of not more than Rs 25 lakh per borrower. Further, the RBI intends to increase the target for loans to the priority sector for UCBs to 75 per cent of adjusted net bank credit or credit-equivalent amount of off-balance sheet exposure, whichever is higher, from 40 per cent currently.
RBI's draft circular said that a large exposure of banks to single borrowers or groups of connected borrowers leads to a credit concentration risk. If the proposed rules are approved in their current form, they will be effective from March 31, 2023.
"An appropriate glide path is proposed to be provided to UCBs for compliance with the aforesaid norms/limits/targets," the RBI said. It will accept suggestions on the draft rules till January 20.
Earlier this year, the city-based Punjab and Maharashtra Co-operative (PMC) Bank collapsed as Housing Development and Infrastructure Group companies - in which it had a combined exposure of about Rs 6,200 crore - could not service loans. Of the total exposure, only Rs 440 crore was disclosed while the balance was hidden through multiple accounts. RBI's proposed rules are aimed at preventing such bank failures.
"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. Keeping in view the above aspects, the extant single/group exposure limits of UCBs have been reviewed and it has been decided to rationalise the single/group exposure limits for UCBs with a view to containing the concentration risk," the central bank said. -TNN
