What changed
Previously, the aggregate of all loans against shares and debentures for Primary (Urban) Co-operative Banks was capped at 20% of owned funds. Now, that ceiling is linked to Tier I capital as defined in the April 1, 2024 Master Circular on capital adequacy, using the figure as of March 31 of the previous financial year.
What it means for you
This change tightens the capital base used for the lending limit, as Tier I capital is a narrower measure than total owned funds. UCBs with lower Tier I capital relative to owned funds will see a reduced capacity for such loans, potentially impacting their securities-backed lending portfolios.
What you must do
- Recalculate your bank's 20% ceiling using Tier I capital as on March 31, 2024, to assess the new limit.
- Review existing loan exposures against shares and debentures to ensure compliance by the January 1, 2025 effective date.
- Update internal policies and reporting systems to reference Tier I capital instead of owned funds for this limit.
- Communicate the change to credit and risk teams to adjust lending strategies accordingly.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Credit and risk management departments of UCBs, Borrowers seeking loans against shares and debentures from UCBs
When does the new Tier I capital-based ceiling take effect?
The change is effective from January 1, 2025, as per the circular.
Does this circular change any other provisions related to loans against shares and debentures?
No, only the basis for the 20% ceiling has changed; all other related provisions remain unchanged.