PMC Bank fallout: RBI proposes to tighten lending norms for UCBs, says exposure to single borrowers leads to credit concentration risk

Mumbai: The RBI on Monday proposed reduction in loan amount an urban co-operative bank can lend to a single entity and a group of borrowers to 10 percent and 25 percent, respectively, with an aim to prevent PMC Bank like scams caused by large exposure to one group.

RBI releases draft circular on limits on exposure to single and group borrowers/parties and large exposures and revision in priority sector lending targets for UCBs pic.twitter.com/UPI3RkF1gp

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Currently, primary (urban) co-operative banks (UCBs) are permitted to have exposures up to 15 percent and 40 percent of their capital funds to a single borrower and a group of borrowers, respectively. Punjab and Maharashtra Co-operative (PMC) Bank collapsed because of its huge exposure totalling Rs 6,226.01 crore to Housing Development and Infrastructure Ltd (HDIL) Group companies. [caption id=“attachment_5684541” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] Earlier this month, the RBI Central Board had reviewed functioning of the urban cooperative banks and the enforcement framework. In a draft circular, the RBI said large exposure of banks to single borrowers/parties or groups of connected borrowers/parties leads to credit concentration risk. When large exposures to a few single parties/groups become non-performing, it affects the capital/net worth of the bank concerned significantly and, at times, leads to liquidity and solvency risk for the lender. “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 draft said on which the RBI had sought comments till 20 January. The RBI now proposes that the prudential exposure limits for UCBs for a single borrower/party and a group of connected borrowers/parties should henceforth be 10 percent and 25 percent, respectively, of their Tier-I capital. The revised exposure limits shall apply to all types of fresh exposures taken by UCBs, it said. Also once the proposal comes into force, UCBs will have to bring down their existing exposures, which are in excess, within the aforesaid revised limits by 31 March 2023. The draft also suggests that UCBs should have at least 50 percent of their loan portfolio comprising loans of not more than Rs 25 lakh per borrower/party. Further, it proposes to increase the overall priority sector lending (PSL) target for UCBs from the present level of 40 percent of adjusted net bank credit (ANBC) to 75 percent. Following exposure of scam in the PMC Bank, which had over 9.15 lakh depositors, the RBI had imposed restrictions on withdrawals. Statutory inspection of PMC Bank by the RBI had revealed large group exposure toward Housing Development and Infrastructure Ltd (HDIL) Group companies to the tune of about Rs 6,226.01 crore (inclusive of interest accrued in the related accounts). Out of the total exposure of Rs 6,226.01 crore at the end of March 2019 to the HDIL group, only Rs 439.58 crore was disclosed to the RBI and remaining Rs 5,786.43 crore remained undisclosed.