What changed
The prudential exposure ceiling for single borrowers was reduced from 20% to 15% of capital funds, and for group borrowers from 50% to 40%. Capital funds now include both Tier I and Tier II capital as per the enclosed annexure. Non-funded credit limits will be fully counted (100%) instead of the earlier 50% for exposure calculation. Additionally, exposure now includes Non-SLR investments as specified in the April 14, 2004 circular.
What it means for you
UCBs must tighten credit concentration risk by lowering individual and group exposure limits, which may require reducing existing large exposures or raising additional capital. The inclusion of Tier II capital and full counting of non-funded limits increases the effective capital charge for credit and investment exposures. Banks with high exposure to single or group borrowers will need to diversify or seek capital augmentation to comply by March 31, 2007.
What you must do
- Recalculate exposure limits using the new 15% (single) and 40% (group) of capital funds (Tier I + Tier II) effective April 1, 2005 (per directive issued April 15, 2005).
- Include 100% of non-funded credit limits (sanctioned or outstanding, whichever higher) in exposure calculations.
- Include Non-SLR investments as per circular UBD.BPD.PCB 45/16.20.00/2003-04 dated April 14, 2004 in exposure.
- Identify existing borrowers where exposure exceeds the new limits and prepare a plan to bring them within limits by March 31, 2007.
- Acknowledge receipt of this circular to the concerned RBI Regional Office.
Who it affects
All Primary (Urban) Co-operative Banks, Borrowers with large credit or investment exposure from UCBs, UCB credit and risk management teams
What is the new exposure limit for a single borrower?
The prudential exposure ceiling for a single borrower is now 15% of the bank's capital funds (Tier I and Tier II capital combined).
How is non-funded credit limit treated under the new norms?
Non-funded credit limits (e.g., letters of credit, guarantees) are now counted at 100% of the sanctioned limit or outstanding, whichever is higher, for exposure calculation, up from the earlier 50%.
What is the deadline for existing exposures that exceed the new limits?
Existing exposures exceeding the revised limits must be brought down within the new limits by March 31, 2007, giving banks a maximum of two years from April 1, 2005.