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. advances against shares, debentures and bonds
2. investments in shares, debentures and bonds

2.1 Exposure Ceiling on Credit to Individual/Group Borrowers
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 -

1. credit exposure to an individual borrower does not exceed 20 per cent of capital funds, and
2. 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.

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.

2.2.1 Capital Funds

The 'Capital Funds' would comprise of -
a) Paid up Capital; |
b) Free Reserves as per the audited accounts.
c) the amounts held under the head 'Building Fund'.

Free reserves will exclude reserves, if any, created out of revaluation of fixed assets, or reserves created to meet outside liabilities, and all reserves/provisions which are created to meet anticipated loan losses, losses on account of frauds etc. and depreciation in investments and other assets, and other outside liabilities.For a fund to be included in the capital fund, the fund/reserve should satisfy the following two criteria

1. the reserve/fund should have been created by appropriation to profit and ;
2. it should be a free reserve i.e. not a specific reserve.

Hence, funds like Centenary Celebration Fund, Dividend Equalisation Fund and Members Uplift Fund etc. should not be included in the capital Fund'

2.2.2 Credit Exposure (Loans and Advances)

(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.

(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.

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 Undivided 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 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

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).

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.

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
   
   4.1Advances 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.

4.2.1 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.

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.

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:

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. 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. 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.

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.

5.9 Exposure Norms for Investments

Banks are allowed to make investments 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.

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).

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.

Credit Exposure Norms and Statutory/ Other Restrictions on Loans & Advances

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.

Credit Exposure Norms and Statutory/Other Restrictions on Loans & Advances

Name of the Bank :

Position as on :

Name of the Bank ________________________________

Chief Executive Officer

Credit Exposure Norms and Statutory/Other Restrictions on Loans & Advances