PMC Bank: RBI proposes cap on single party exposure for UCBs, also hike priority sector lending threshold

Mumbai: Call it the PMC effect. Reserve Bank is working towards capping exposure limits for UCBs for a single borrower/party and a group of connected borrowers/parties to 10 per cent and 25 per cent, respectively, of their Tier-I capital.

The draft circular released on Monday also stipulates that the threshold for lending to the priority sector for Urban co-operative banks be raised to 75 per cent from the current 40 per cent

After one of the better performing urban co-operative bank(UCB), the Punjab Maharashtra Co-operative Bank (PMC) under-reported its exposure to a single borrower-HDIL, leading to its almost collapse, regulatory and supervisory practices of UCBs came in for criticism.

“The prudential exposure limits for UCBs for a single borrower/party and a group of connected borrowers/parties shall henceforth be 10 per cent and 25 per cent, respectively, of their Tier-I capital. The revised exposure limits shall apply to all types of fresh exposures taken by UCBs” RBI said. UCBs were allowed to have exposures up to 15% and 40% of their capital funds to a single borrower and a group of borrowers, respectively.

“Large exposure of banks to single borrowers/parties or groups of connected borrowers/parties leads to credit concentration risk” RBI said.

Simultaneously, the banking regulator also proposes UCBs shall have at least 50 per cent of their loan portfolio comprising loans of not more than ₹25 lakh per borrower/party. Besides, the overall priority sector lending target for UCBs is raised from the present level of 40 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (CEOBSE), whichever is higher, to 75 per cent of ANBC or CEOBSE, whichever is higher, the Reserve Bank said. The new threshold is propsed to be effective March 2019.