RBI restricts urban cooperative banks from offering large corporate loans

MUMBAI: The Reserve Bank of India (RBI) on Monday restricted urban cooperative banks (UCBs) from offering large corporate loans through several changes to lending norms, after depositors lost large sums of money following the crisis at Punjab and Maharashtra Co-operative (PMC) Bank.

The regulator slashed single and connected borrower exposure for UCBs, hiked the priority sector lending (PSL) target and specified a portfolio mix for at least half of their loan books. The guidelines will be applicable from March 31, 2023.

The prudential exposure limits for UCBs for a single borrower and a group of connected borrowers were lowered to 10% and 25%, respectively, of their tier-I capital. These limits were earlier at 15% and 40%, respectively.

These are part of the RBI’s draft circular on limits on exposure to single and group borrowers, large exposures and revision in PSL targets for primary UCBs. The RBI said it would provide an appropriate glide path to UCBs for compliance with the norms.

“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/or solvency risk for the bank,” said the RBI.

The RBI also proposed that UCBs shall have at least 50% of their portfolio comprising loans of not more than ₹25 lakh per borrower. Loans shall include all types of funded and non-funded exposures in the nature of credit.