What changed
RBI observed that some UCBs were lending to high net worth individuals (HNIs) to buy KVPs, with a 10% margin and 90% loan, then pledging the KVPs as collateral. The circular explicitly bans all loans for acquiring or investing in KVPs and other small savings instruments, effective immediately.
What it means for you
UCBs must immediately stop any lending product designed to fund purchases of KVPs or similar small savings instruments. This closes a loophole where bank credit was used to shift existing savings from deposits to small savings, rather than generating new savings. Non-compliance could invite regulatory action.
What you must do
- Review all existing loan portfolios and identify any loans sanctioned for acquisition of KVPs or other small savings instruments.
- Immediately cease sanctioning any new loans for the purpose of investing in KVPs or similar small savings schemes.
- Ensure loan policies and product documentation explicitly exclude funding for small savings instruments.
- Acknowledge receipt of this circular to the respective Regional Office of RBI.
Who it affects
All Primary (Urban) Co-operative Banks (UCBs), Branches and credit departments of UCBs, High Net Worth Individuals (HNIs) who previously accessed such loans
Does this circular apply to loans for other small savings instruments besides KVPs?
Yes, the circular explicitly states that banks must ensure no loans are sanctioned for acquisition of or investing in 'Small Savings Instruments including Kisan Vikas Patras'.
What was the typical loan structure that RBI found problematic?
RBI found that some UCBs required borrowers to bring in 10% of the KVP face value as margin, then treated the remaining 90% as a loan, with the KVP pledged as collateral.
What should we do if we have existing KVP loans on our books?
The circular does not explicitly address existing loans, but you should review them for compliance and consult your Regional Office for guidance on any remedial actions.