The Reserve Bank of India (RBI) has been working towards capping exposure limits for Urban Co-operative Banks (UCBs) for a single borrower/party at 10% and a group of connected borrowers/parties at 25% of the tier-1 capital. A draft circular was released on Monday; it stated that the threshold of UCBs, for lending to the priority sector, must be raised to 75%.
The latest exposure limits will be applicable to all types of fresh exposures pursued by UCBs. Currently, the exposure limits are at 15% and 40% of the capital funds to a single borrower and group of borrowers respectively. RBI mentioned that large exposures of banks to single borrowers/groups of borrowers may lead to credit concentration risk.
Following UCB, Punjab Maharashtra Co-operative Bank (PMC) under-reported its exposure to a single borrower-HDIL. This led PMC to a state where it almost collapsed. The regulatory and supervisory practices of UCBs were widely criticised.
RBI proposed that UCBs should have a minimum of 50% of their loan portfolio comprising loans valued within Rs.25 lakh per borrower/party. Further, the overall priority sector lending target for UCBs is increased from 40% of the adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (CEOBSE), whichever is higher. It is increased to 75% of ANBC or CEOBSE, whichever is higher. The latest threshold may tentatively be effective from March 2019.