Master Circular on Exposure Norms for Urban Co-op Banks

RBI/2007-2008/69 UBD.PCB.MC.No.3 /13.05.000/2007-08 July 2, 2007 Chief Executive Officers of All Primary (Urban) Co-operative Banks  Dear Sir/Madam, Master Circular on Exposure Norms and Statutory/Other Restrictions - UCBs Please refer to our Master Circular UBD.BPD(PCB).MC.No.7/13.05.00/2005-06 dated July1, 2006 on exposure norms and statutory/other restrictions on loans & advances (available at RBI website www.rbi.org.in ).The enclosed Master Circular consolidates and updates all the instructions issued by the department on the subject till 30 June 2007. Yours faithfully, (N.S.Vishwanathan) Chief General Manager-in-Charge Master Circular Exposure Norms and Statutory/ Other Restrictions Contents 1. General 2. Exposure Norms 2.1. Exposure  Ceiling on Individual/ Group Borrowers 2.2. Definitions 2.3. Exposure to Real Estate Sector 3. Ceiling on Unsecured Advances 3.1. Ceiling for single party / connected of group 3.2. Aggregate Ceiling on Unsecured Advances 4. Statutory Restriction 4.1. Advances against Bank's Own Shares 4.2. Restrictions on Power to Remit Debts 5. Regulatory Restriction 5.1. Granting Loans and Advances to Directors and their Relatives 5.2. Maximum Ceiling on Advances to Nominal Members 5.3. Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks 5.4. Bridge Loans/Interim Finance 5.5. Loans and Advances against Shares, Debentures and Bonds 5.6. Bank Finance to Non-Banking Financial Companies (NBFCs) 5.7. Financing for Agricultural Activities 5.8. Restriction on Advances to Defaulters of Statutory Dues Annexure 1 Annexure 2 Annexure 3 Annexure 4 Appendix Master Circular Exposure Norms and Statutory/ Other Restrictions 1. General As a prudential measure aimed at better risk management and avoidance of concentration of credit risk, the primary (urban) co-operative banks have been advised to fix limits on their exposure – to individual borrowers and group borrowers, to specific sectors, and towards unsecured advances and unsecured guarantees 1.2 In addition, these banks are also required to observe certain statutory and regulatory restrictions in respect of : (i) advances against shares, debentures and bonds (ii) investments in shares, debentures and bonds 1.3 Currently operative instructions on all these aspects are detailed in the following paragraphs. 2. Exposure Norms 2.1 Exposure Ceiling  to individual/Group Borrowers 2.1.1 Primary (urban) co-operative banks are required to fix, with the approval of their Board of Directors, exposure ceiling in relation to bank's capital funds. The exposure for the purpose shall comprise both credit exposure (loans and advances and investment exposure (Non SLR) as detailed at para 2.2.2(B) so that – (i) the exposure to an individual borrower does not exceed 15 per cent of capital funds, and the  exposure to a group of borrowers does not exceed 40 per cent of capital funds. (ii) The exercise of computing the  exposure ceilings may be conducted every year after the finalisation and audit of balance sheet of the bank and the  exposure ceilings may be advised to the loan sanctioning authorities  and the investment department in the bank. 2.1.2 In view of the linking of shareholding to lending, accretion to or reduction in the share capital after the balance sheet date, may be taken into account for determining exposure ceiling at half- yearly intervals, with the approval of their Board of Directors. Accordingly banks may, if they so desire, fix a fresh exposure limit taking into account the amount of share capital available as on 30th September. However, accretion to capital funds other than to share capital, such as half-yearly profit etc., will not be eligible for reckoning the exposure ceiling. Banks should also ensure that they do not take exposures in excess of ceiling prescribed in anticipation of infusion of capital on a future date. 2.2 Definitions 2.2.1 Capital Funds The "Capital Funds" for the purpose of exposure norm would comprise both Tier I and Tier II Capital as defined in the annexure 1, enclosed 2.2.2 The Exposure shall include both credit exposure  (Loans and Advances) and investment exposure as indicated below: A. Credit Exposure: (i) Credit exposure shall include – (a) funded and non-funded credit limits and underwriting and similar commitments, (b) facilities extended by way of equipment leasing and hire purchase financing, and (c) ad hoc limits sanctioned to the borrowers to meet the contingencies. (ii) Credit exposure shall not include loans and advances granted against the security of bank's own term deposits. (iii) The sanctioned limit or outstanding whichever is higher shall be reckoned for arriving at credit exposure limit. Further, in case of fully drawn term loans, where there is no scope of re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding for arriving at credit exposure limit. (iv) In respect of non-funded credit limit, 100 % of such limit or outstanding, whichever is higher, need be taken into account for the purpose. (v) Consortium/Multiple Banking/Syndication The level of individual bank's share shall be governed by single borrower / group exposure. B. Investment Exposure (Non SLR): (i) Banks are allowed to make investments only in the following non-SLR debt securities: (a) bonds of public sector undertakings, (b) bonds/ equity of All India Financial Institutions, (c) infrastructure bonds floated by All India Financial Institutions,       (d) unsecured redeemable bonds floated by nationalised banks, (e) units of UTI and (f) certificate of deposits issued by scheduled commercial banks and other financial institutions approved by RBI. (ii) The total investment in (a) to (f) above should not exceed 10 per cent of the banks' total deposits as on March 31 of the previous year, with a sub-ceiling of 5 per cent of incremental deposits of the previous year for investments covered under (e). (iii) Further, the Banks should ensure that exposure, to a single issuer of debt securities is within the individual exposure ceiling prescribed by the RBI for grant of advances, based on the capital fund of the bank 2.2.3 Group The decision in regard to definition of a group is left to the perception of the banks who are generally aware of the basic constitution of their clientele. The group to which a particular borrowing unit belongs may, therefore, be decided by the banks on the basis of relevant information available with them, the guiding principle in this regard being commonality of management and effective control . 2.2.4 The total of the time and demand liabilities shall have the same  meaning as defined in Section 18 read with Section 56 of the Banking Regulation Act 1949, subject to the modification that 75% of the paid-up capital and reserves of a bank may be added to its time and demand liabilities. 2.2.5 All bills of exchange not accompanied by the official receipts of the Indian Railways or Indian Airlines Corporation or Road and Water Transport Operators, as approved by the Board of Directors of the primary co-operative bank, shall be deemed to be clean bills. 2.2.6 The different firms with one or more common partners engaged in the same line of business, viz. manufacturing, processing, trading activity, etc. shall be deemed to be connected group and units coming under common ownership shall be deemed to be a single party. 2.2.7 Unsecured advances shall include clean overdrafts, loans against personal security, clean bills or Multani hundies purchased or discounted, cheques purchased and drawals allowed against cheques sent for collection but shall exclude: (i) advances backed by guarantee of the central or state governments, public sector financial institutions, banks and Deposit Insurance & Credit Guarantee Corporation; (ii) advances against supply bills drawn on the central or state governments or state owned undertakings which are accompanied by duly authorised inspection notes or receipted challans; (iii) advances against trust receipts; (iv) advances against inland D/A bills drawn under letters of credit; (v) advances against inland D/A bills (even where such bills are not drawn under letters of credit) having a usance of not exceeding 90 days; (vi) advances granted to salaried employees against personal security, provided that the Co-operative Societies Act of the State concerned contains an obligatory provision for deduction of periodical loan instalments by the employer out of the employee's salary/wages to meet the bank's claims and provided further that the bank has taken advantages of this provision in respect of each of such advances; (vii) advances against supply bills drawn on private parties of repute and receipted challans of public limited companies and concerns of repute and not outstanding for more than 90 days; (viii) advances against book debts which are not outstanding for more than 90 days; (ix) cheques issued by governments, public corporation and local self governing institutions; (x) advances in the form of packing credit for exports; (xi) demand drafts purchased; (xii) the secured portion of a partly secured advances, and (xiii) advances against legal assignment of contract moneys due, or to become due. 2.2.8 Concerns in which a director of a primary co-operative bank or his relative is interested shall mean – (i) proprietary concerns/ partnership firms (including Hindu Unpided Family concerns and association of persons) in which a director of the bank or his relative is interested as proprietor/ partner/ co-parcener; (ii) private/ public limited companies, where a director of the bank is a guarantor for repayment of loans and advances granted to the company. 2.2.9 The 'relative' of a director of the bank shall mean any relative of a director of the bank as indicated hereunder: A person shall be, deemed to be relative of another, if and only if, : (a) they are members of a Hindu Unpided Family; or (b) they are husband and wife; or (c) the one is related to the other in the manner indicated below : (i) Father (ii) Mother(including step-mother) (iii) Son (including step-son) (iv) Son's wife (v) Daughter (including step-daughter) (vi) Daughter's husband (vii) Brother (including step-brother) (viii) Brother's wife (ix) Sister (including step-sister) (x) Sister's husband 2.2.10 The words 'any other financial accommodation' shall include funded and non-funded credit limits and under-writings and similar commitments, as under  : (i) The funded limits shall include loans and advances by way of bills purchase/discounting, pre-shipment and post-shipment credit facilities and deferred payment guarantee limits extended for any purpose including purchase of capital equipment and acceptance limits in connection therewith sanctioned to borrowers and guarantees by issue of which a bank undertakes financial obligation to enable its constituents to acquire capital assets. (ii) The non-funded limits shall include letters of credit, guarantees and under-writings and similar commitments. 2.2.11 In view of the fact that salary earner banks grant advances to salaried employees of a particular institution/group of institutions to which their membership is restricted and deductions are made from the salaries through their employers, the salary earner banks may allow such advances in excess of the limits prescribed above subject to the following conditions: (i) The Co-operative Societies Act of the State concerned contains an obligatory provision for deduction of periodical loan instalments by the employer out of employee's salaries/ wages to meet bank's claims. (ii) The bank has taken advantage of this provision in respect of each of such advance. (iii) A general limit for such advances is fixed by the bank in terms of certain multiples of the pay packet taking into account the monthly income of the employees. 2.2.12 The advances granted by primary (urban) co-operative banks, other than salary earners societies, to all salaried borrowers wherein repayment is sought to be ensured through deduction from borrower's salaries as per the provisions of the State Co-operative Societies Act, should be reckoned as secured only for the purpose of computation of total unsecured advances to the members as a whole. While granting advances to the individual salaried borrowers, the banks should ensure that these advances do not exceed the maximum limit on unsecured advances as indicated in paragraph 3.1 (a). 2.3 Exposure to Real Estate Sector Primary (urban) co-operative banks are advised to frame, with the approval of their Board of Directors, comprehensive prudential norms relating to the ceiling on the total amount of  real estate loans, keeping in view the Reserve Bank guidelines to ensure that bank credit is used for construction activity and not for activity connected with speculation in real estate subject to the following: 2.3.1 PCBs may utilise up to 15 per cent of their total deposit resources to provide housing loans and other block capital loans. 2.3.2 However, the above limit may be exceeded to the extent of funds obtained for the purpose from higher financing agencies and refinance from the National Housing Bank. 3. Ceiling on Unsecured Advances (with surety & without surety) 3 .1 Ceiling for a single party/connected group a) The maximum limit on unsecured advances ( with sureties ) to a single party/connected group of borrowers will be as under: Category of Advances

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-2008/69 · issued 02 Jul 2007. The plain-English explanation above is BankPulse’s own independent summary.

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