In a proposal possibly aimed at nudging urban co-operative banks (UCBs) to convert into small finance banks (SFBs), the Reserve Bank of India has cut their limits on exposure to single and group borrowers and prescribed that at least 50 per cent of their loan portfolio should comprise loans that do not exceed more than ₹25 lakh per borrower/party.

In a draft circular, the RBI also said the target for loans and advances to priority sector for UCBs will stand increased to 75 per cent (from the current 40 per cent) of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher.

The prudential exposure limits for UCBs for a single borrower/party and a group of connected borrowers/parties will henceforth be 10 per cent (15 per cent currently) and 25 per cent (40 per cent), respectively, of their Tier-I capital.

Parity in norms

The aforementioned measures, which have to be complied with by March 31, 2023, will bring parity in prudential norms governing UCBs and SFBs. The RBI said these measures are expected to reduce the credit concentration risk of the UCBs and promote financial inclusion.

Co-operative bankers feel that large UCBs such as Saraswat Co-operative Bank and Shamrao Vittal Co-operative Bank may have a find it a bit tough to bring down their exposures to comply with the new prudential norms.

UCBs have so far resisted converting into SFBs as they currently enjoy the status of a universal bank. But if the proposed measures become a reality, they will become narrow banks like SFBs.

Given that UCBs are under the dual regulation of the RBI and the registrar of cooperative societies, the RBI wants these banks to convert into SFBs so that it alone has effective oversight over them. By cutting prudential exposure limits to a single borrower/party and a group of connected borrowers/parties, the RBI probably wants to ensure that a Punjab and Maharashtra Co-operative (PMC) Bank kind of situation does not recur.

In the draft circular, the RBI observed that large exposure of banks to single borrower/party 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.

Enhancement of priority sector lending targets (to 75 per cent), according to the draft circular, is also considered necessary for the purpose of meeting the larger objectives of UCBs.

The RBI said UCBs have to reach the first target of 50 per cent priority sector lending by March 31, 2021; the second target of 60 per cent by March 31, 2022; and finally, 75 per cent by March 31, 2023.

The circular said: “UCBs shall prepare, with the approval of their Board, an action plan for compliance with the revised exposure norms/limits and priority sector lending targets. They are also advised to establish an appropriate mechanism to regularly monitor the progress made under the action plan for compliance with the above instructions.”