RBI/2008/ 46
UBD.PCB.MC.No.1/13.05.000/2008-09

July 1, 2008

The 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.3 /13.05.00/2007-08 dated July 2, 2007 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 2008.

Yours faithfully,

(A.K Khound)
Chief General Manager-in-Charge

Master Circular
Exposure Norms and Statutory/
Other Restrictions

Contents

Master Circular
Exposure Norms and Statutory/ Other Restrictions

1. General

1.1 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 –

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

i. the exposure to an individual borrower does not exceed 15 per cent of capital funds, and
ii. the  exposure to a group of borrowers does not exceed 40 per cent of capital funds.

2.1.2 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.

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

The "Capital Funds" for the purpose of exposure norm would comprise both Tier I and Tier II Capital as defined in the annex 1, enclosed

2.2.2 The  Exposure shall include both credit exposure  (Loans and Advances)and investment exposure (non–SLR)  as indicated below:

2.2.2.1 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.

2.2.2.2 Investment Exposure (Non SLR): Banks are allowed to  invest in ‘A’ or equivalent rated commercial papers (CPs), debentures and bonds that are redeemable in nature. Investments in perpetual debt instruments are, however, not permitted.

a. Investments in  non-SLR  securities should be limited to 10% of a bank’s total deposits as on March 31 of the previous year.

b. Investments in unlisted securities should not exceed 10% of the total non-SLR investments at any time. Where banks have already exceeded the said limit, no incremental investment in such securities will be permitted.

c. All investments as above will be subject to the prescribed prudential individual/ group exposure limits.

2.2.3 Group

The decision in regard to definition of a group is left to the perception of the banks, which 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.

2.3 Real Estate Sector Exposure limit

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.The total exposure to real estate including individual housing loan and commercial real estate  may be limited to  15 per cent of the  total deposit resources of a bank

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.

2.4Inter-bank exposure limit

2.4.1  Exposure to any single bank should not exceed 2% of the depositing bank’s DTL as on March 31 of the previous year, inclusive of its total non-SLR investments and deposits placed with that bank. Deposits, if any, placed for availing CSGL facility , currency chest facility and non-fund based facilities like Bank Guarantee ( BG), Letter of Credit (LC), would be excluded to determine the single bank exposure limit for this purpose.  

2.4.2 The total amount of funds placed as inter-bank deposits(for all purposes, including clearing, remittance, etc)should not exceed 10% of the DTL of a PCB as on March 31 of previous year.

2.4.3  Deposits placed by non-scheduled PCBs with scheduled PCBs

2.4.3.1Non-scheduled PCBs are permitted to place deposits with  strong scheduled PCBs complying with the following norms:

2.4.3.2 Acceptance of deposits from non-scheduled UCBs by the scheduled  UCBs will also be subject to the following conditions:

3. Ceiling on Unsecured Advances (with surety & without surety)

3.1 Ceiling for a single party/connected group

The maximum limit on unsecured advances (with sureties) to a single party/connected group of borrowers will be as under:  

(b) UCBs  may grant unsecured advances without surety within the under noted limits only in respect of purchase/discount/withdrawal against third party  cheques for a temporary period of 30 days in emergent cases:

3.2. Aggregate ceiling on unsecured advances

The total unsecured advances (with surety and without surety ) granted  by a bank to its members should not exceed 15 % of its  demand and time liabilities (DTL) as against the earlier limit of 33.33 %. However, banks are permitted to conform to the lower limit in a gradual manner, i.e. 20 % of DTL by March 31, 2006 and further to 15 % of DTL by March 31, 2007

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

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 –

i. any of its past or present directors, or
ii. any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or
iii. 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.

5. REGULATORY RESTRICTIONS

5.1 Granting Loans and Advances to Directors and their Relatives

5.1.1 With effect from 1 October 2003, primary (urban) co-operative    bank have been prohibited to make, provide or renew either secured or unsecured loans and advances or any other financial accommodation to its directors or their relatives, and the firms / companies/ concerns in which they are interested. The existing advances may be allowed to continue up to the date when they are due. The advances should not be renewed or extended further. 

5.1.2 The following categories of director related loans are exempted from the purview of the above instructions.

(i) Regular employee-related loans to staff directors on the board of UCBs;
(ii) Normal loans as applicable to members to the directors on the boards of salary earners’ co-operative banks and
(iii) Normal employee-related  loans to managing directors of multi-state co-operative banks.
(iv) Loans to  directors and their relatives against Fixed Deposits and Life Insurance policies standing in their own name.

5.1.3 Banks are required to submit information pertaining to loans and advances granted to their directors and relatives for each quarter end (i.e. 31 March, 30 June, 30 September and 31 December) in the proforma given in Annex 2 & 3,to the concerned Regional Office of this Department within fifteen days from the close of the respective quarter.

5.1.4 In case of supersession of the Board of Directors of a bank, the concerned bank should submit the statement in respect of loans and advances availed by special officers/Administrators including 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 Bank Finance  against Shares, Debentures and Bonds

5.5.1 Bank Finance  to Stock Brokers

5.5.1.1 Banks are prohibited from extending any fund based or non fund based credit facilities, whether secured or unsecured , to stockbrokers against  shares and debentures/bonds, or  other securities, such as fixed deposits,  LIC policies etc.

5.5.1.2 Banks are not permitted to extend any facility to commodity brokers. This would include issue of guarantees on their behalf.

5.5.1.3 Advances against units of mutual funds can be extended only to individuals as in the case of advances against the security of shares, debentures and bonds ( para 5.5.2 ).

5.5.1.4 Any credit facility presently in force, but not in consonance with the above instructions should be withdrawn /closed without any delay. A compliance report in this regard may be submitted to the Regional Office concerned of Reserve Bank.

5.5.2 Loans against the primary / collateral security of shares/ debentures should be limited to Rs. 5 lakh if the security is in physical form and upto Rs. 10 lakh if the security is in demat form.

5.5.3 A margin of 50 percent should be maintained on all such advances.

5.5.4 Aggregate of all loans against the security of shares and debentures should be within the overall ceiling of 20 percent of the owned funds of the bank.

5.5.5 Banks are required to report to the respective Regional Offices of the Reserve Bank of India their outstanding, to individual borrowers and other entities against shares on quarterly basis in the format given in Annex 4.

5.5.6 It is essential that before accepting shares as security, banks should put in place appropriate risk management systems. All the approved loan proposals should be placed before the Audit Committee of the Bank at least once in two months. The Management and Audit Committee should ensure that all loans against shares are made only to those individuals who are not in any way connected with any stock broking entity. Details of the loan sanctioned should be reported to the Board in its subsequent meeting.

5.6 Bank Finance to Non-Banking Financial Companies (NBFCs)

5.6.1 Admission of NBFCs as Members

i. 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.

ii. 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.

5.6.2 Activities eligible for finance to NBFCs engaged in hire purchase/ leasing activities

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:

Note:

i. The maximum limit on bank finance should be within the overall ceiling of borrowing by NBFCs, upto ten times of their NOF.

ii. Bank finance to leasing concerns should be restricted only to "full payout" leases i.e. those leases where the cost of the asset is fully recovered during the primary lease period itself and further it should cover purchases of only new equipment.

iii. As a prudent policy, lease rentals due during the period of next five years should alone be taken into account for the purpose of lending.

5.6.3 Activities not eligible for finance to NBFCs engaged in hire purchase/leasing activities

i. 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:

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

ii. 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.

5.6.4 Financing of NBFCs by Scheduled Primary (Urban) Co-operative Banks

i. 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:

a. the bills should have been drawn by the manufacturers on dealers only,
b. the bills should represent genuine sale transactions as may be ascertained from the chassis/engine numbers, and
c. 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.

ii. The Scheduled 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.

iii. 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.

iv. 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.

5.7 Financing for Agricultural Activities

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

i. 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.,
ii. Credit should be extended only after obtaining 'no dues certificate' from the existing credit agencies in the area, and
iii. Banks should follow the scales of finance and obtain security as per guideline issued by RBI/NABARD.

5.8 Restriction on Advances to Defaulters of Statutory Dues

5.8.1 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.

5.8.2 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.

Annex 1

Master Circular
Exposure Norms and Statutory/
Other Restrictions Definitions ( vide Para 2.2.1):
Tier I Capital /Core Capital

Tier I Capital would include the following items:

i. Paid-up share capital collected from regular members of a bank having voting powers.

ii. Free Reserves as per the audited accounts. Reserves, if any, created out of revaluation of fixed assets or those created to meet outside liabilities should not be included in the Tier I Capital. Free reserves shall exclude all reserves / provisions which are created to meet anticipated loan losses, losses on account of fraud etc., depreciation in investments and other assets and other outside liabilities. While the amounts held under the head "Building Fund" will be eligible to be treated as part of free reserves, "Bad and Doubtful Reserves" shall be excluded.

iii. Capital Reserve representing surplus arising out of sale proceeds of assets.

iv. Any surplus (net) in Profit and Loss Account i.e. balance after appropriation towards dividend payable, education fund, other funds whose utilisation is defined,  asset loss, if any, etc.

NOTE: Amount of intangible assets, losses in current year and those brought forward  from previous periods, deficit in NPA provisions, income wrongly recognized on non performing assets , provision required for liability devolved on bank, etc. will be deducted from Tier I Capital.

Tier II Capital

Undisclosed Reserves

5.9 These often have characteristics similar to equity and disclosed reserves. They have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulation of profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses.

Revaluation Reserves

5.10 These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as 'Core Capital'. Revaluation reserves arise from revaluation of assets that are undervalued in the bank's books. The typical example in this regard is bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market value of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation of those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 %  when determining their value for inclusion in Tier II Capital i.e. only 45% of revaluation reserve should be taken for inclusion in Tier II Capital. Such reserves will have to be reflected on the face of the balance sheet as revaluation reserves.

General Provisions and Loss Reserves 

5.11 These will include such provisions of general nature appearing in the books of the bank which are not attributed to any identified potential loss or a diminution in value of an asset or a known liability.  Adequate care must be taken to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier II capital as indicated above.  To illustrate : excess provision in respect of Bad and Doubtful Debts, general provision for Standard Assets etc. could be considered for inclusion under this category.  Such provisions which are considered for inclusion in Tier II capital will be admitted upto 1.25% of total weighted risk assets.

Investment Fluctuation Reserve

5.12 Balance, if any, in the Investment Fluctuation Reserve Fund of the bank.  

Hybrid Debt Capital Instruments

5.13 Under this category, there are a number of capital instruments, which combine certain characteristics of equity and certain characteristics of debt.  Each has a particular feature which can be considered to affect its qualify as capital.  Where these instruments have close similarities to equity, in particular, when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital.     

Subordinated Debt

5.14 To be eligible for inclusion in Tier II capital, the instrument should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses and should not be redeemable at the initiative of the holder or without the consent of the bank's supervisory authorities.  They often carry a fixed maturity and as they approach maturity, they should be subjected to progressive discount for inclusion in Tier II capital.  Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included as part of Tier II capital.  Subordinated debt instruments will be limited to 50 percent of Tier I capital.

NOTE :  (a)    At  present  UCBs  do not issue instruments of the type indicated at (v) and (vi) above.  However, there is no bar on issuing such instruments subject to provisions of respective State Co-operative Societies Act/Multi State Co-operative Societies Act.  Issue of such instruments will be subject to prior approval of RBI.

5.15 It may  be noted  that  the total of Tier II elements will be limited to a  maximum of 100 percent of total Tier I elements for the purpose of compliance with the norms.

Annex 2

Master Circular
Exposure Norms and Statutory/
Other Restrictions

Proforma – I
Information in respect of Loans and Advances
Sanctioned to the Bank's Directors (including Relatives)
[Vide para 5.1.3 ]

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.

Annex 3

Master Circular
Exposure Norms and Statutory/
Other Restrictions
Proforma – II
[Vide para 5.1.3]

Name of the Bank   :
Position as on :

(Rs. in lakhs)

Note:  Figures should be rounded-off upto two decimal points.

Annex 4

Master Circular
Credit Exposure Norms and Statutory/
Other Restrictions on Loans & Advances
Statement showing details of advances against security of
Shares/Debentures etc. granted to individuals/share brokers
and other entities for the quarter ended __________________
[Vide para 5.5.5]

Name of the Bank ________________________________

Chief Executive Office

Appendix

Master Circular Exposure Norms and Statutory/
Other Restrictions on Loans & Advances

A. (i)    List of Circulars consolidated in the Master Circular

List of Other Circulars from which instructions relating to Credit Exposure Norms and Statutory/Other Restrictions on Loans & Advances have also been consolidated in the Master Circular