UBD.BPD(PCB).MC.No.8 /13.05.00/2003-04

March 10, 2004

Chief Executive Officers of
All Primary (Urban) Co-operative Banks 

Dear Sir,

The Reserve Bank of India has been periodically issuing instructions to primary (urban) co-operative banks, regarding credit exposure norms and statutory restrictions on loans & advances. In order to enable the banks to have all the instructions at one place, a Master Circular incorporating all the currently operative instructions/ guidelines on the subject has been prepared, which is enclosed.

2. Please acknowledge receipt of this Master Circular to the concerned Regional Office of this Department.

Yours faithfully,

(S. Karuppasamy)

Chief General Manager-in-Charge

Encl: As above

Annexure 1

Annexure 2

Annexure 3

Appendix

• 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 on grant of loans and advances.

1.3Currently operative instructions on all these aspects are detailed in the following paragraphs.

2. Credit Exposure Norms

2.1.1 Primary (urban) co-operative banks are required to fix, with the approval of their Board of Directors, an exposure ceiling for credit exposure (loans and advances), in relation to bank's capital funds so that -

• credit exposure to an individual borrower does not exceed 20 per cent of capital funds, and
• credit exposure to a group of borrowers does not exceed 50 per cent of capital funds.

2.1.2 The exercise of computing the credit exposure ceilings may be conducted every year after the finalisation and audit of balance sheet of the bank and the credit exposure ceilings may be advised to the loan sanctioning authorities in the bank.

2.2.1 Capital Funds

1. Paid up Capital;
2. Free Reserves as per the audited accounts.
3. the amounts held under the head 'Building Fund'.

i. Credit exposure shall include -

1. funded and non-funded credit limits and underwriting and similar commitments,
2. facilities extended by way of equipment leasing and hire purchase financing, and
3. 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.

iv. In respect of non-funded credit limit, only 50% 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.

1. advances backed by guarantee of the central or state governments, public sector financial institutions, banks and Deposit Insurance & Credit Guarantee Corporation;
2. 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;
3. advances against trust receipts;
4. advances against inland D/A bills drawn under letters of credit;
5. 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;
6. 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;
7. 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;
8. advances against book debts which are not outstanding for more than 90 days;
9. cheques issued by governments, public corporation and local self governing institutions;
10. advances in the form of packing credit for exports;
11. demand drafts purchased;
12. the secured portion of a partly secured advances, and
13. advances against legal assignment of contract moneys due, or to become due.

1. proprietary concerns/partnership firms (including Hindu Undivided Family concerns and association of persons) in which a director of the bank or his relative is interested as proprietor/partner/co-parcener;
2. private/public limited companies, where a director of the bank is a guarantor for repayment of loans and advances granted to the company.

A person shall be, deemed to be relative of another, if and only if, :

a) they are members of a Hindu Undivided Family; or
b) they are husband and wife; or
c) the one is related to the other in the manner indicated below :

1. Father
2. Mother(including step-mother)
3. Son (including step-son)
4. Son's wife
5. Daughter (including step-daughter)
6. Daughter's husband
7. Brother (including step-brother)
8. Brother's wife
9. Sister (including step-sister)
10. Sister's husband

1. 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.
2. The non-funded limits shall include letters of credit, guarantees and under-writings and similar commitments.

1. 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.
2. The bank has taken advantage of this provision in respect of each of such advance.
3. 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.

3.1 Ceiling for a single party/connected group

3.2 Aggregate Ceiling on Unsecured Advances

Every primary (urban) co-operative bank shall ensure that the aggregate of the total unsecured advances granted by it to its members should not exceed 33 1/3% of the total of time and demand liabilities of the bank, at any time.

No bank shall finance a borrower, who is already enjoying credit facilities with another bank, without obtaining a ’NOC’ from such financing bank and where the aggregate of the credit facilities enjoyed by the borrower exceeds the ceiling stipulated in the directive for a single party, the prior approval of Reserve bank shall be obtained.

4. STATUTORY RESTRICTIONS
   
   
   
   4.1 Advances against Bank's Own Shares

In terms of Section 20(1) (a) of the Banking Regulation Act 1949 (As applicable to co-operative societies), a primary (urban) co-operative bank cannot grant loans and advances on the security of its own shares.

4.2 Restrictions on Power to Remit Debts

4.2.1 Section 20-A (1) of the Banking Regulation Act, 1949 (As applicable to Co-operative Societies) stipulates that a primary (urban) co-operative bank shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by -

1. any of its past or present directors, or
2. any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or
3. any individual, if any of its directors is his partner or guarantor.
   
   

4.2.2 In terms of Section 20-A (2) of the said Act, any remission made in contravention of the provisions of sub-section (1) above shall be void and of no effect.

1. For availing loans or advances from a primary (urban) co-operative bank, its membership is a must. However, primary (urban) co-operative banks are normally not expected to enrol non-banking financial institutions like investment and financial companies as well as other persons engaged in the business competing with or conflicting with the business of the bank, as their members since it would be in contravention of the state co-operative societies act concerned and will also not be in conformity with the provision of model by-law No. 9. Therefore, banks should not finance NBFCs other than those engaged in hire- purchase/leasing.
2. Similarly, admission of non-banking financial companies which are not engaged exclusively in leasing/hire purchase business as members may be contrary to the provisions contained in the State Co-operative Societies Act concerned and model by-law No. 9. It will, therefore, be necessary for the primary (urban) co-operative banks to obtain prior approval of the concerned Registrar of Co-operative Societies before admitting such leasing/hire purchase companies as members.

Within the prescribed credit exposure norms and above stated restrictions, primary (urban) co-operative banks, with working capital funds aggregating to Rs. 25 crores and above, may finance the equipment leasing/hire purchase companies, subject to the following limits:

1. The following activities undertaken by non-banking financial companies engaged in hire purchase/leasing activities are not eligible for bank credit. As such, these items should be excluded from the build-up of current assets while arriving at permissible bank finance for all categories of NBFCs:

1. Bills discounted/rediscounted by NBFCs, except where specifically permitted;
2. Investments made in shares, debentures etc., of a current nature, i.e., stock-in-trade;
3. Investment in and advances to subsidiaries, group companies or other entities; and
4. Investments in and inter-corporate loans/deposits to other companies.

1. In respect of items indicated at (a) and (b) above, banks should not make any adjustment in the projected net working capital (NWC). It may be added that the projected NWC represents long-term surplus available to support current operations and, therefore, does not need to be adjusted as a result of changing/pruning the level of current assets while reducing the level of maximum permissible bank finance.

1. The Scheduled primary (urban) co-operative banks may rediscount bills discounted by NBFCs arising from sale of commercial vehicles, including light commercial vehicles, two wheeler and three wheeler vehicles, subject to normal lending safeguards and the following conditions:

1. the bills should have been drawn by the manufacturers on dealers only,
2. the bills should represent genuine sale transactions as may be ascertained from the chassis/engine numbers, and
3. before rediscounting the bills, the scheduled primary (urban) co-operative banks should satisfy themselves about the bona- fides and track record of NBFCs which have discounted the bills.

1. The Schedule primary (urban) co-operative banks may provide finance to NBFCs eligible for bank finance for the purpose of on-lending to Small Road and Water Transport Operators (SRWTOs) for purchase of trucks and classify such advances under priority sector, provided the ultimate borrowers (SRWTOs) satisfy the eligibility requirements for being classified under the priority sector.
2. Scheduled primary (urban) co-operative banks may finance NBFCs for on-lending to agriculture, and the same may be reckoned for the purpose of priority sector lending as indirect finance to agriculture.
3. The Scheduled primary (urban) co-operative banks may extend finance to NBFCs or other financial intermediaries for on-lending to food and agro -processing industries in the tiny sector and classify such finance under priority sector after satisfying that the relevant norms at the ultimate borrowal level are complied with.

1. The primary (urban) co-operative banks are permitted to finance agricultural activities under priority sector subject to the following conditions:

1. Banks would provide direct finance only to members (no nominal members) and not through any agency like primary agricultural credit societies and primary land development banks etc.,
2. Credit should be extended only after obtaining 'no dues certificate' from the existing credit agencies in the area, and
3. Banks should follow the scales of finance and obtain security as per guideline issued by RBI/NABARD.

1. Under the law, employees' contributions to provident fund deducted from wages of the employees/members, for a period of more than six months and not paid to the Commissioner are a first charge on the assets of the borrowers, in the case of the insolvency/winding up of the borrowing employer. In the circumstances, primary (urban) co-operative banks should safeguard their interest vis-à-vis such statutory dues.
2. Therefore, banks should satisfy themselves that there are no arrears of Provident Fund and other statutory dues of the borrowers by obtaining a declaration from them that all such dues have been duly paid. Proof in this regard may be called for only in cases where banks have reason to doubt the borrowers' declaration. Even where a proof is required, it is not necessary to insist on a certificate from the Regional Provident Fund Commissioner; production of a receipt evidencing the payment of the dues or a certificate from the auditors of the borrower or any other similar proof may be considered sufficient. In the case of sick units where there are arrears for reasons beyond the control of the borrowers, banks may continue to consider such cases on merits.

Information in respect of Loans and Advances Sanctioned to the Bank's Directors (including Relatives)

Name of the Bank :

Position as on :

Note: Different type of facilities sanctioned to a borrower should be indicated separately against column 4 and 5.

Name of the Bank :

Position as on :

Statement showing details of advances against security of Shares/Debentures etc.
granted to individuals/share brokers and other entities for the quarter ended

Name of the Bank ________________________________

Chief Executive Officer